December 7th, 2011 9:23 AM by Mel Samick
Good, old times... we used to talk about Europe in the context of a splendid vacation, beautiful architecture, fashion designers and other pleasures of this world. Nowadays, the European debt crisis is the prime focus of investors' attention around the world. On Wednesday, the global markets cheered the joint decision of the European Central Bank, Federal Reserve, the Bank of England and the Central banks of Canada, Japan and Switzerland to support markets by easing lending policies. The important action was a signal to the markets that Central Banks will step up and take serious actions to shore up the crisis. Obviously, there is no permanent or easy solution to the problem. The crisis in Europe stretches far beyond local debt problems; it is rather a systematic crisis of the union, where currency issues, distribution of power and even international relationships are involved. While analysts and journalists speculate about possible cures and the probability of EU breakup scenarios, German Chancellor Angela Merkel says the resolution process will take years.
The Rating agencies, particularly S&P, appeared to learn lessons from the recent crisis. They seem to maintain greater focus on timely downgrading of borrowers, especially governments. S&P will possibly cut the triple-A debt rating of France as early as this coming week, according to the past week's news. The agency has recently downgraded Belgian debt from AA+ to AA. Interestingly, just a few weeks ago, S&P released an announcement of France's downgrade. The announcement stayed active during several trading hours, until it was recalled by S&P as a "mistake."
In the United States, the Consumer Confidence measure jumped to 56 while expectations were 45. The strong standing of consumers perhaps contributed to the growth of Motor Vehicle Sales in November and the sweeping success of the Black Friday weekend, when retail sales bested records. By the way, there isn't anything dramatic behind the "Black" color in the name of the day that jump starts holiday shopping season. The story is rather simple and down-to-Earth: once upon a time, retailers broke a chain of losses ("red ink" in accounting terms) and crossed into positive ("black ink") with the help of holiday sales. The Friday after Thanksgiving has been labeled "Black" since that time.
Pending Home Sales, a measure of deals struck on existing homes, jumped 10.4 percent in October after a 4.6 percent decline in September. New Home Sales rose slightly in October, but the overall market for new housing remains in a depressed mode. Median prices fell 0.4 percent to $212,300 and seasonally adjusted annual sales of 307,000 are still far from a healthy market threshold of 700,000. Mortgage applications dropped this past week marking the third week of declines in a row; the trend is mostly attributed to the slowing interest in refinancing.
The Chicago PMI set the tone of the week. The index accelerated to 62.6, above the consensus mark and well above the threshold of 50, suggesting good economic growth. The ISM Manufacturing Index for November was also reported at a higher-than-expected level of 52.7, above the level of 50, indicating growth. Construction Spending extended its stable upward trend and increased 0.8 percent topping the forecast of 0.3 percent after 0.2 percent growth in September. Per the Productivity and Costs report of the Bureau of Labor Statistics, labor productivity increased in the third quarter and labor cost fell more than expected. Compensation rose an annualized 0.6 percent.
Manufacturing activity in other parts of the world continued to slow down. Even China showed signs of contraction for the first time in three years and warned that the situation is on a dangerous path. Industrial production in the Eurozone continued its decline, reinforcing recessionary fears. On Wednesday of this past week, Central Banks of China and Brazil relaxed monetary policy in an attempt to counter the trends.
Per the ADP National Employment Report, employers added 206,000 jobs--many more than the 130,000 that was estimated. Cautious optimism sparked by the ADP report gained ground later in the week, when the Employment Situation data showed the lowest unemployment rate in 2.5 years at 8.6 percent as compared to the previous reading of 9 percent. Rising weekly unemployment claims reported Thursday was much less of a concern with more influential positive reports in the background. The improving employment situation along with strong domestic manufacturing readings and good news in retail strengthened the hopes of a sustained recovery in the United States.
Information provided by NYCB Capital Markets