The countdown to the monthly anniversary of the QE taper on December 18th 2013 begins
Tuesday witnessed a bullish mood enveloping both European and USA markets, with the main USA indices gaining much of the ground lost over recent days. The USA markets were not only buoyed by thin positive data, but by the narrative contained in a speech from a member of the FOMC, Plosser, who stated that the USA recovery was on a firmer footing and that the Fed was right to taper the monetary easing stimulus by $10 billion in the month of December. Analysts and investors are now eagerly anticipating the monthly anniversary of that reduction, January 18th, to see if the Fed will continue on that course, or refrain from implementing another cut of the same value in January.
In the morning session on Tuesday positive news was published in relation to the Euro area’s industrial production, up by 1.8% year on year, ahead of many analysts’ expectations. In the seventeen nations shared currency union capital goods production growth accelerated by 3% during October 2013 to November 2013.
The UK latest house price index was published in the morning European session, house prices in the UK are up 3.1% year on year according to the UK official stats. body the ONS. However, that growth may be severely curtailed by the introduction of new regulations in the mortgage market beginning in April 2014 that will severely impact on consumer’s ability to borrow.
That mortgage attrition is already being experienced in the USA where ‘natural’ affordability constraints have resulted in Wells Fargo, who has 60% of the new lending market, witnessing their lending falling by circa 60% in the fourth quarter of 2013. The reason for the fall, according to analysts and Wells Fargo notes, is rising mortgage rates deterring customers. It would appear that the secular house price boom, experienced in the USA in 2013, may be coming to an abrupt end.
In other USA news small business optimism is very sluggish, at 93.9 the reading from the NFIB is still six points below the pre-recession average. A note of real optimism was buried in the report; hiring amongst small businesses is apparently at its highest level since 2006. Retail sales in the USA inched forward in December by 0.2%, ahead of expectations of 0.1%. However, in an economy 70% ‘dependent’ on the consumer that retail figure (in isolation) was a poor print, despite many in the mainstream financial media dressing it up otherwise.
Industrial production up by 1.8% in euro area
In November 2013 compared with October 2013, seasonally adjusted industrial production grew by 1.8% in the euro area (EA17) and by 1.5% in the EU28, according to estimates from Eurostat, the statistical office of the European Union. In October industrial production decreased by 0.8% and 0.5% respectively. In November 2013 compared with November 2012, industrial production increased by 3.0% in both the euro area and the EU28. In November 2013 compared with October 2013, production of capital goods grew by 3.0% in the euro area and by 2.6% in the EU28. Durable consumer goods increased by 2.2%.
UK House Price Index, November 2013
In the 12 months to November 2013 UK house prices increased by 5.4%, down from a 5.5% increase in the 12 months to October 2013. The year-on-year increase reflected growth of 5.6% in England, 5.4% in Wales, 2.5% in Scotland and 3.3% in Northern Ireland. House price growth is beginning to increase strongly across parts of the UK, with prices in London increasing at more than double the UK average. Annual house price increases in England were driven by rises in London (11.6%), the South East (4.5%) and the West Midlands (4.4%). Excluding London and the South East, UK house prices increased by 3.1%.
US Small Business Optimism Inches Forward
Small-business optimism ended the year slightly up from November at 93.9, but below the previous 3 mid-year readings of over 94 and 6 points below the pre-recession average, according to the National Federation of Independent Business’ (NFIB’s) latest index. On the positive front, reports of capital spending rose significantly in December, increasing by 9 points from November and job creation among NFIB firms was the best since February 2006.
Retail Sales in U.S. Increased More Than Forecast in December
Retail sales rose more than forecast in December as consumers snapped up holiday gifts amid year-end discounting. Purchases increased 0.2 percent after a 0.4 percent advance in November that was smaller than previously reported, Commerce Department figures showed on Tuesday in Washington. Excluding cars, demand jumped by the most in almost a year. Holiday-season deals helped retailers overcome the coldest December in four years.
Home lending plummets at Wells Fargo
Rising mortgage rates mean that fewer people are refinancing their homes, which hit fourth-quarter mortgage results at Wells Fargo and J.P. Morgan Chase the country’s leading residential lenders, according to earnings reports released Tuesday. During the fourth quarter, Wells, the No. 1 mortgage lender by market share, funded $50 billion in residential mortgages, down 60% from $125 billion in the year-earlier period.
Market overview at 10:30 PM UK time January 14th
The DJIA closed up 0.71%, the SPX up 1.08% and the NASDAQ closed up 1.69%. In Europe the STOXX index closed up 0.24%, CAC up 0.26%, DAX up 0.32% and the UK FTSE up 0.14%.
Looking towards the market open on Wednesday January 15th the DJIA equity index future is up 0.51%, SPX future up 0.98% and the NASDAQ future is up 1.89%. In Europe the STOXX equity index future is currently up 0.23%, DAX up 0.31%, CAC up 0.49% and the UK FTSE up 0.49%.
NYMEX WTI oil finished the day up 0.65% at $92.40 per barrel, NYMEX nat gas closed up by 2.08% at $4.36 per therm. COMEX gold finished the trading sessions down 0.54% at $1244.40 per ounce, with silver down 0.69% at $20.24 per ounce.
Forex focus
The pound appreciated 0.4 percent to 83.14 pence per euro late afternoon London time after weakening 1.1 percent in the previous three days. Sterling rose 0.4 percent to $1.6448, the biggest advance since Dec. 27th.
The pound has gained 7.3 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg’s Correlation-Weighted Indices. The euro has strengthened 2.7 percent and the dollar has dropped 2.4 percent. The pound rose for the first time in four days versus the euro as inflation slowed to the Bank of England’s target of 2% for the first time in more than four years, boosting optimism the U.K.’s economic recovery will strengthen.
The yen fell 1.1 percent to 104.15 per dollar mid-afternoon in New York after plunging as much as 1.3 percent, the biggest drop since Dec. 18th. Japan’s currency slid 1.2 percent to 142.52 per euro after appreciating to 140.50 yesterday, the strongest since Dec. 6th. The dollar traded at $1.3683 per euro. The yen fell the most in four weeks versus its U.S. peer after a government report showed Japan’s current-account deficit widened to a record in November.
The Dollar Spot Index rose 0.4 percent to 1,024.83, after falling 0.7 percent during the previous three days. The gauge slid 0.4 percent on Jan. 10th when a government report showed U.S. employers added fewer workers in December than economists forecast.
The loonie dropped by 0.8 percent to C$1.0946 per dollar and reached C$1.0959, the weakest since October 2009. It has fallen 2.9 percent versus the greenback this year, the most among 16 major currencies after the rand’s 3.1 percent slide. Canada’s dollar fell to a four-year low due to speculation that the Bank of Canada may signal an interest-rate cut after reports last week showed payrolls declined and the trade deficit swelled. The central bank meets Jan. 22nd.
Bonds brief
The UK benchmark 10-year gilt yield was little changed at 2.83 percent after dropping to 2.82 percent, the lowest level since Dec. 3rd. The price of the 2.25 percent bond due in September 2023 was 95.13.
Benchmark USA 10-year yields rose four basis points, or 0.04 percentage point, to 2.87 percent late afternoon New York time. The 2.75 percent note due November 2023 dropped 3/8, or $3.75 per $1,000 face amount, to 98 31/32. The yield declined to 2.82 percent yesterday, the lowest since Dec. 11th. Treasuries fell for the first time in four days after Philadelphia Federal Reserve President Charles Plosser said the economy is on a firmer footing and the central bank’s decision to cut debt purchases was a step in the right direction.
Fundamental policy decisions and high impact news events for January 15th
Wednesday we receive the data on retail sales in Switzerland expected in at 2.3% up, late morning Europe’s positive trade balance is expected in at €16.7 billion.
In the USA the latest PPI data will be published. It’s a leading indicator of consumer inflation – when producers charge more for goods and services the higher costs are usually passed on to the consumer. The anticipation is for a print of 0.5% up from the previous month’s figure of 0.1%. The Empire State manufacturing survey is published Wednesday with the print expected in at 3.2, significantly above the 1.0 published in December. Crude oil inventories are expected to have fallen by a similar level previously of 2.7 million barrels. The USA beige book is published. This analysis is used by the FOMC to help make their next decision on interest rates. However, it tends to produce a mild impact as the FOMC also receives 2 non-public books – the Green Book and the Blue Book – which are widely believed to be more influential to their rate decision.
In Japan the tertiary industry activity is published as is core machinery orders. Machine orders are predicted to have increased by 1.2%. Australia publishes several key data results, inflation expectations should come in similar to the previous level of 2.1%, the unemployment rate at 5.3%, with circa 10.3K new jobs created.
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