USA balance of payments are scheduled to come in at $101 billion for the quarter on Tuesday, but the markets are expected to ignore the data as the last FOMC meeting of 2013 takes centre stage
There was plenty of positive data, contained in the high impact news events published on Monday, which cheered the markets in the USA and Europe. After the wave of mainly positive European PMIs from Markit were published in the morning session (with the exception of France which appears to be heading back into recession), the USA manufacturing PMI came in close to expectations at 54.4 in the afternoon session. USA non-farm productivity also came in very positive; increasing by 3% annually. The Empire State manufacturing survey disappointed by posting a 1 versus expectations of a 4, despite being the fourth month of misses in series it’s still an improvement on the -2.2 recorded last month.
Meanwhile 34 percent of economists surveyed by Bloomberg are forecasting that the Fed will reduce its $85 billion in monthly bond purchases at the two-day FOMC meeting starting Tuesday, futures traders have bet the Fed will keep interest rates near zero at least until the end of 2014.
In Europe, once the PMIs from Markit were ‘absorbed’ into the market, the international trade balance for Europe was published showing an increase to a €17.2 bn surplus for the month. Now readers and investors, who are constantly bombarded by financial mainstream media releases telling us that “everything in Europe bad”, “everything in the USA good” need to meditate on this figure for a moment. The USA balance of payments is published on Tuesday, and the expectation is for a trade deficit of circa $100 bn for the quarter. We have two similar sized areas in terms of population sizes and overall business output, Europe is (apparently) still deeply mired in recession, however, the ECB has not had to resort to the QE to infinity programme the Fed has and Europe’s balance of payments is positive, whereas the USA balance of payments is ‘off the scale’ for the quarter.
Mario Draghi, the president of the ECB, held a press conference on Monday, he discussed many issues, but perhaps the highlight was a warning for the SRM and banking union to be simple mechanisms and not get caught up in bureaucracy, a habit and criticism of the EU;
We should not create a Single Resolution Mechanism that is single in name only. In this respect, I am concerned that decision-making may become overly complex and financing arrangements may not be adequate. I trust that the European Parliament, together with the Council, will succeed in creating a true Banking Union.
US Output growth remains strong and close to November’s 20 – month peak
Manufacturing business conditions in the U.S. improved solidly in December, despite the rate of growth having eased slightly over the month. This was signalled by the Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMITM), which is based on approximately 85% of usual monthly replies, posting 54.4, down marginally from 54.7 in November.
Euro area international trade in goods surplus 17.2 bn euro
The first estimate for the euro area (EA17) trade in goods balance with the rest of the world in October 2013 gave a 17.2 billion euro surplus, compared with +9.6 bn in October 2012. The September 2013 balance was +10.9 bn, compared with +8.6 bn in September 2012. In October 2013 compared with September 2013, seasonally adjusted exports rose by 0.2% while imports fell by 1.2%. These data are released by Eurostat, the statistical office of the European Union. The first estimate for the October 2013 extra-EU28 trade balance was a 4.3 bn euro surplus, compared with -10.2 bn in October 2012.
Empire State Manufacturing Survey
The December 2013 Empire State Manufacturing Survey indicates that manufacturing conditions were flat for New York manufacturers. The general business conditions index rose three points but, at 1.0, indicated that activity changed little over the month. The new orders index inched up, but remained negative at -3.5, while the shipments index rose to 7.7. The unfilled orders index fell to -24.1, and the inventories index declined twenty points to -21.7; both indexes reached their lowest levels since 2009. The prices paid index was little changed at 15.7.
US Productivity and Costs News Release
Non-farm business sector labor productivity increased at a 3.0 percent annual rate during the third quarter of 2013, the U.S. Bureau of Labor Statistics reported today. The increase in productivity reflects increases of 4.7 percent in output and 1.7 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the third quarter of 2012 to the third quarter of 2013, productivity increased 0.3 percent as output and hours worked rose 2.1 percent and 1.8 percent, respectively.
Market overview at 11pm UK time December 16th
The DJIA closed up 0.82% at 15884; a Santa rally to 16,000 can’t be ruled out, the SPX up 0.63% at 1786, a rally up to 1800 being the obvious next handle. The NASDAQ closed up 0.71%. Euro STOXX closed up 1.95%, CAC up 1.48%, DAX up 1.74% and the UK FTSE up 1.28%.
The DJIA equity index future is currently at the time of writing up 0.78%, SPX future up 0.67%, NASDAQ future up 0.49%. STOXX future is up 1.81%, DAX future up 1.61% CAC future up 1.60% and the FTSE future up 1.27%.
Commodities rallied in a correlated move with the main markets due to improved economic activity; NYMEX WTI oil finished the day up 0.91% at $97.48 per barrel, NYMEX nat gas finished the day down 1.65% at $4.28 per therm. COMEX gold is up 0.79% at $1244.40 per ounce, with silver on COMEX flat at $20.10 per ounce.
Forex focus
The euro rose 0.1 percent to $1.3761 late evening New York time. The 17-nation common currency slipped 0.1 percent to 141.75 yen, while the dollar dropped 0.2 percent to 103.02 yen after rising to 103.92 yen on Dec. 13th, the strongest level since October 2008. The euro rose versus the dollar as a survey of purchasing managers showed manufacturing and services output in the region expanded at a faster pace this month than economists forecast.
The U.S. currency has strengthened 3.7 percent this year, according to Bloomberg’s Correlation-Weighted Indices, which tracks the 10 most developed-nation currencies. The yen has declined 14.3 percent, the worst performer, whilst the euro has advanced the most, at 8.7 percent.
The loonie, as the Canadian dollar is known, was little changed at C$1.0596 per U.S. dollar late evening in Toronto. One loonie buys 94.38 U.S. cents. It touched C$1.0684 on Dec. 4th, the lowest closing since May 2010, after the Bank of Canada left interest rates unchanged and warned of low inflation. The Canadian dollar traded at almost the lowest level in three years amidst speculation that it will weaken against its U.S. counterpart as the Federal Reserve prepares to reduce stimulus.
Bonds
The benchmark U.S. 10-year yield rose one basis point, or 0.01 percentage point, to 2.88 percent at 5 p.m. in New York. The yield, which on Dec. 13th reached a one-week high of 2.89 percent, fell earlier to 2.84 percent. The price of the 2.75 percent note due in November 2023 declined 1/8, or $1.25 per $1,000 face amount, to 98 29/32. Five-year notes yielded 1.53 percent after touching 1.55 percent on Dec. 13th, the highest since Sept. 18th.
Treasuries fell, pushing 10-year note yields toward the highest level in a week, before the Federal Reserve decides at a two-day meeting whether to start slowing bond purchases used to keep borrowing rates low and sustain the economic recovery.
Fundamental policy decisions and high impact news events that could affect market sentiment on December 17th
Tuesday sees the publication of a raft of inflation data for the UK, CPI expected in at 2.2%, PPI expected in at -0.5%, RPI at 2.7%, and HPI (house price inflation) expected in at 4.2% year on year. Also in the UK the CBI publishes its industrial orders expectation data, expected to print at 12 up from 11 the previous month.
In Europe the ZEW economic sentiment index is published; expected in at 60.9. German ZEW data is expected in at 55. The Eurogroup meetings are held with once again focus expected on banking union, potential monetary easing in the form of QE and the improving backdrop of the European economy. Europe will also see CPI published, expected in at 0.9% year on year.
Canada publishes its manufacturing sales data on Tuesday, expected to come in at 2.2% annually. CPI for the USA is expected in at 0.1% month on month. The current account for the USA is expected in at -$101bn. Mid-morning UK time the BoE governor Mark Carney speaks in a press conference.
High impact news events take a breather until later evening; New Zealand’s current account is expected to print at -$4.45 bn. The ANZ business consumer index is expected in at 60.4, similar to the previous month. Australia’s RBA governor at events speaks with analyst and investor attention focused on the Aussie dollar’s drop versus its major peers during the preceding week due to the comments attributed to him regarding a loose target of 0.8500 for the Aussie versus the USD. Japan’s trade balance is expected in at -¥1.13 trillion.
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