After five days of making higher lows and highs, the Euro outperformance ended after the European Central Bank press conference on Thursday. The ECB’s weakened growth forecasts for the eurozone, emphasising how difficult the global growth picture is still looking, even if some of the immediate concerns over bailouts and sovereign risks default have subsided in recent months.
Post ECB meeting, there was massive unwinding of euro trades and the market focused on the Italian political tensions as a factor as they have been burning in the background for several days. The underperformance of Italian government bonds was nothing extraordinary and was more technical in nature rather than a material change on investors economic or policy outlooks in Italy.
Back in the US, developments were primarily in the political landscapes rather any than economic developments. Democrats and Republicans continued the political drama in Washington without achieving any concrete results as to the fiscal cliff negotiation. However, hopes remain in markets especially after US President Obama said that a fiscal cliff deal was possible ‘in about a week’ if Republicans compromised on raising tax on the wealthiest.
After starting the week on a positive note, the post ECB press conference on Thursday opened the door to a rate cut in Q1 next year. Consequently, after trading at a high of 1.3127 on Thursday, the euro broke lower to 1.2877 as the pressure started and demand was weak that even positive reports on the Greek buyback was unable to provide any bounce at all. The Euro closed the week at 1.2927
The pound continued range trading during the week following the positive news out of Europe’s Greek deal and the negative headlines from the UK office of the Budget responsibility. After starting the week at 1.6054 the pound ended the week at 1.6039
In the commodities world, gold showed a pulse by the end of the week after a faltering late performance. After registering a low of $1685, the metal closed the week at $1704.
The latest development in the Middle East political tension has not affected oil prices as we had expected. After falling to a three weeks low of $85.68 after the ECB mentioned the bank projected the economy to contract 0.5 percent this year worse than the September forecast of a drop of 0.4 percent, Oil rose on Friday on speculation that China’s production rose at the fastest pace since March 2012. The first month delivery closed the week at $85.93.
ADP reported that only 118,000 jobs were added in November and October’s reading was revised slightly lower to 157,000 from 158,000. Expectations were for 129,000 jobs to be created in November and this miss marks the fourth month of decline for ADP job creation. One of the more interesting aspects of the ADP report is the breakdown of the private sector by service producing and goods producing jobs. Service producing sectors are beyond the ones tracked and created 114,000 payroll jobs for November. Goods only gained 4,000 private sector jobs. As expected, hurricane Sandy cost 86,000 estimated job losses according to the report.
On a different note, the latest Non-Manufacturing Report Composite Index came at 54.7 percent, signaling slightly faster growth than last month’s 54.2 percent. Economists has a consensus of 53.5 percent
Europe & UK
During the ECB press conference on Thursday, President Mario Draghi seemed more hesitant on a deposit rate cut. His comment about ensuring ECB liquidity “reaches the real economy” was perhaps a hint that if the Council loses confidence in the H2 2013 recovery, further, ‘credit easing’ type policy could be an option. According to him, the ECB needed to lose confidence in the H2 recovery to feel the pressure to pull a policy lever.
On the other hand, the ECB staff survey was more aggressive with their new forecasts. However, in reducing the 2013 GDP growth forecast from +0.5 percent to -0.3 percent, the ECB staff have gone well below other official sector institutions and below all recent consensuses in the market. The staff inflation forecasts for inflation were at 1.6 percent in 2013 and 1.4 percent in 2014 much lower than what economists had projected close to two percent.
European bond spreads continued to widen by the end of week and markets shifted their attention to Italy, as the government overcame a confidence motion, when ex Prime Minister Berlusconi’s threatening to withdraw his support and bring down the government
The euro zone’s economy contracted in the third quarter of 2012 in line with economists’ expectations and confirming a continuing recession in Europe as a technical recession is defined as two straight quarters of contraction.
In a report published by Eurostat, the Euro zone’s gross domestic product shrank 0.1 percent in the third quarter of 2012 and remained unchanged from the previous quarter. Year-on-year, euro zone GDP fell 0.6 percent compared to a year earlier, also in line with expectations.
The German factory orders were stronger than market expectations in October, rising 3.9% m-o-m versus 1% consensus. According to the German economy ministry, a rise in demand from foreigner trading partners, in particular from those outside of the Euro zone, was behind the surprise. This was the first major real data release this month and continued to show a gap between survey (eg PMI) data which has been weaker and real data which has been stronger.
The UK trade balance was weaker than market expectations in October, with the visible trade balance recording a deficit of GBP -9.5bn versus consensus -8.6bn and higher than September’s -8.4bn which was also revised higher. The overall deficit was -3.6bn versus -3bn consensus.
The Peninsula
