An upbeat week for markets stood in sharp contrast to the previous week’s large financial market declines. The key was a decisive move by central banks to allow for less expensive overseas borrowing of U.S. dollars, particularly helpful to the European Central Bank’s effort to avert an immediate worsening of the eurozone debt crisis. Other positive signs include a drop in the U.S. unemployment rate to 8.6%, accompanied by a healthy increase in the number of U.S. jobs, and a sharp rise in U.S. consumer confidence. Strong early holiday-season sales among U.S. retailers are also encouraging.
For the week, major stock indices around the world posted gains of 5% or more, highlighting once again the abnormally volatile period for global markets. U.S. Treasury yields rose in response to the unexpected drop in the U.S. unemployment rate, while the euro rallied earlier in the week in reaction to the improved prospects for European liquidity.
U.S. and global economic news
Global central bank action sparks market rally
Central banks including the U.S. Federal Reserve, the Bank of Canada, the European Central Bank (ECB), the Bank of England, the Bank of Japan, and the Swiss National Bank on Wednesday announced a plan to cut in half the cost of borrowing dollars from the Fed. The move is designed to assure financial markets that the ECB will have the money it needs to lend to struggling eurozone banks and therefore avoid a deepening of the debt crisis. However, the measure is seen as only a temporary way to alleviate market concerns, and doesn’t directly address the deep financial troubles facing European governments.
Belgian credit rating cut
Belgium’s government credit rating was cut by Standard & Poor’s by one notch to AA. The country’s borrowing costs rose to their highest levels in 11 years after it agreed to buy Dexia’s Belgian bank unit and guarantee part of its liabilities for the next decade.
Unemployment rate down; jobs numbers up
The U.S. labor market strengthened in November, as a rise of 120,000 jobs in the nonfarm payroll total was accompanied by a drop in the unemployment rate to 8.6% from 9.0% in October. Also positive are upward revisions of the October and September payroll numbers. October’s figure rose to a gain of 100,000 from a previously reported 80,000, and September was revised to a 210,000 gain from 158,000, as more reports from small businesses came in.
U.S. consumer confidence rises sharply
Consumer confidence rose sharply in November, according to three domestic U.S. indices. The Conference Board’s index increased to 56 from 40.9 in October, its biggest jump since April 2003. The Thomson Reuters/University of Michigan final index of consumer sentiment rose to 64.1 from 60.9, and the Bloomberg Consumer Comfort Index’s monthly expectations gauge also rose.
Weekly jobless claims rise above 400,000
Initial claims for unemployment benefits among U.S. workers rose unexpectedly last week, climbing by 6,000 to a seasonally adjusted 402,000. Economists surveyed by Dow Jones Newswires had expected a drop of 3,000. This was the first week since October that new claims for jobless benefits were above 400,000. The four-week average for new claims increased by 500 to 395,750.
House prices fall again
The S&P/Case-Shiller index of property values in 20 cities dropped 3.6% in September from a year earlier while the figure for the 10-city index was 3.3% lower than September 2010, demonstrating that the housing market has yet to find its bottom.
Fitch cuts U.S. credit outlook to negative
Fitch Ratings downgraded the outlook for U.S. government debt to negative from stable following the failure of the congressional super committee on deficit reduction to come to an agreement by the end of November after being given a mandate to cut the federal budget deficit by $1.2 trillion over 10 years.
Manufacturing weakens in eurozone and Asia
Separate reports from the eurozone and Asian countries point to the same thing –– a contracting manufacturing sector. The eurozone manufacturing purchasing managers’ index (PMI), a monthly survey by Markit, fell to its lowest point in 28 months, 46.4 in November, from 47.1 in October. Anything below 50 denotes contraction. China, South Korea, Taiwan, and Australia also reported shrinking manufacturing activity. India’s PMI was barely positive at 51, down from 52 the previous month.
China shifts stance to monetary easing
In response to signs that its economy is slowing, the Chinese government unexpectedly changed direction with its monetary policy, reversing a trend toward monetary tightening with the announcement that it would allow commercial banks to keep a smaller percentage of their profits as reserves at the central bank. The reserve requirement ratio is now 21% for large banks and 19% for smaller banks.
U.S. and global corporate news
Moody’s cuts loom for European banks
Moody’s Investors Service has placed the subordinated debt ratings of 87 banks in 15 European nations, including France, Italy, and Spain, on review for a downgrade. The move reflects the potential impact of the removal of government support to all subordinated, junior-subordinated, and Tier 3 debt ratings of banks in countries where subordinated debt assumes a level of government support.
American Airlines’ parent files for bankruptcy
AMR, the parent of American Airlines, filed for bankruptcy protection despite having more than $4 billion in cash. American was the only U.S. legacy airline that had not yet sought bankruptcy protection. Over the past decade, AMR has lost more than $10 billion, struggling to compete against rivals United Airlines and Delta Air Lines, who had benefited from court protected restructurings and mergers.
Retailers boast surge in early holiday sales
November was a good month for many major retailers, who started the critically important holiday sales season with better figures than last year’s. Close to two dozen retailers tracked by Thomson Reuters were on target for a 3.1% growth in sales at stores open for more than a year. This included Macy’s (up 4.8% in same-store sales), Saks registered a 9.3% sales rise, and Costco had 7% sales growth. However, sales at Kohl’s fell 6.2%, Target’s same-store sales grew by 1.8%, and J.C. Penney had a 2% decline.
November a hot month for U.S. car sales
Domestic and foreign automakers benefited from an outpouring of pent-up consumer demand in November, as sales of automobiles in the United States were boosted by lower gas prices and a wider availability of Japanese vehicles. Among U.S. manufacturers, Chrysler’s domestic sales rose 45%, Ford Motor’s sales were up 13%, General Motors had a 7% increase in sales.
Foreign automakers generally had a strong month in U.S. sales, with increases by Kia Motor (up 39%), Hyundai Motor (up 22%), Mazda Motor (up 20%), Nissan Motor (up 19%), and Toyota Motor (up 6.7%). Not faring as well were Honda Motor (sales off by 6.7%), Mitsubishi Motors (down 13%) and Suzuki Motor (down 22%).
American Eagle profit soars
American Eagle Outfitters posted a 59% increase in its fiscal third-quarter earnings versus a charge it took a year ago and reported a strong Black Friday shopping weekend. The company started 2011 with weak sales, but results have improved as the year has progressed.
Canadian banks post strong results
Four of Canada’s large chartered banks posted strong quarterly results in sharp contrast to beleaguered European banks. Royal Bank of Canada’s fiscal fourth-quarter earnings rose 43%, Toronto-Dominion Bank’s net income rose 58%, Canadian Imperial Bank of Commerce had a 59% rise in quarterly profit, and Bank of Nova Scotia’s fourth-quarter earnings rose by 11%. Canada’s banks generally benefited from minimal exposure to highly indebted European countries.
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