On again, off again US fiscal cliff negotiations sap risk appetite

Continued haggling in the US undermined risk sentiment over the week, despite more positive developments from China and easing tensions in Europe. A rise in US non-farm payrolls (employment figures) well ahead of expectations (November: 146,000 versus 85,000) helped global stocks; however, other downbeat data proved challenging. Overall, Asian and European stocks outperformed those in the US. Bund yields fell to four-month lows on grim economic prospects, and reflecting the dampened mood the Reuters-Jefferies CRB index fell 1.2% over the week, while Brent Crude Oil lost 4.6%. In the UK, the Chancellor delivered his Autumn Statement, revising economic growth in 2013 to -0.1%, down from the 0.8% predicted in the Budget, and extending the period of austerity by another year to 2017-18.
 

Signs of a reviving Chinese economy helped Chinese shares bounce off four-year lows, as the official manufacturing purchasing managers’ index (PMI) rose to a seven-month high; the market was also boosted following comments by the new Leadership pledging to stabilise exports and boost urbanisation which helped raise global growth expectations. Chinese data released over the weekend and early today was somewhat more mixed, however. Industrial production and retail sales hit eight-month highs in November, but trade numbers were disappointing.
 

In Europe, a sense of easing tensions prevailed. Greece’s announcement to buy back some of its debt appeared to have been successful, while a €39.5bn of aid was agreed for Spanish banks. The Bank of England and the European Central Bank (ECB) both kept policy on hold at their respective meetings, although news that the ECB’s vote was not unanimous led to expectations of a rate cut, which hurt the euro. Elsewhere, some downbeat economic data came in the shape of an unexpected contraction in US manufacturing activity, as the Institute for Supply Management Index fell to 49.5 in November, the lowest level in three years, while the University of Michigan’s consumer confidence index fell to a four-month low. German growth forecasts were also revised down to just 0.4% in 2013.

Slight improvements in some data; Fed to continue easing in 2013

The highlight of the week in the US will be the outcome of the Federal Open Market Committee’s two-day meeting on Wednesday, where it is expected that US$45bn of longer-term Treasury purchases per month is to be announced as Operation Twist comes to an end this year, while the $40bn purchases of mortgage-backed securities should also continue, giving a combined pace of $85bn per month.

Also due for release on Wednesday are UK labour data and eurozone industrial production data. The former is expected to show a picture of strong labour demand with claimant counts, a timely measure of unemployment, remaining steady at 4.8% in November, while eurozone industrial production is likely to fall again in October (consensus: 2.3%, year-on-year). US retail sales are due out on Thursday: Hurricane Sandy and Black Friday (the beginning of the holiday shopping season in the US) are expected to shape November’s figure, which could rise by 0.3% month-on-month helped by gains in car sales. Friday sees the release of December’s flash manufacturing PMI in the US, China, and the eurozone. The European figures are expected to show some improvement, but to remain well below the 50 level that signifies expansion.