There was further evidence of deteriorating global economic conditions during the week with no let up from bad news. The trends in financial markets were more complex as markets looked forward to assess how bad the downturn will be and the impact of monetary and fiscal policy action.
After severe tensions at the end of last week, equity markets looked to rally and this tended to reduced buying support for the US currency. Sentiment was boosted by the US$300bn support package and loan guarantees for Citigroup. There were still important stresses within the credit markets as fears persisted and widening CDS spreads indicated increased default risks.
The US data releases maintained a very weak tone over the week. Durable goods orders fell 6.2% in October while there was a core decline of 4.4% for the month. Elsewhere in the industrial sector, the Chicago PMI index weakened to 33.8 in November from 37.8 previously. This was the weakest reading since the 1982 recession and the orders component in the data was notably depressed.
Jobless claims remained at elevated levels with a decline of only 14,000 to 529,000 in the latest week, the third consecutive figure above 500,000, while consumer spending also fell in October. The final University of Michigan consumer confidence index recorded a renewed decline even with lower energy prices.
There was a further decline in existing and new home sales while inventories were high and there was a further decline in prices according to the latest data. The data overall maintained fears over a very sharp GDP contraction for the fourth quarter.
As well as the Citigroup package, the Federal Reserve announced a further US$800bn support package for financial markets and the economy. In particular, the authorities want to narrow mortgage credit spreads which would lower interest rates and help underpin the housing sector. In this context, the Fed will buy US$600bn in mortgage-backed securities and will also spend a further US$200bn on supporting credit facilities in consumer-related sectors such as autos and student loans.
There were longer-term fears over the budget outlook and a huge expansion of the Fed’s balance sheet with speculation that they will pose major risks to economic and currency stability. President-elect Obama indicated support for afresh fiscal package.
There was a provisional 0.5% decline in German consumer prices for November which cut the annual increase to 1.4%. There was a also a substantial decline in industrial confidence to a 15-year low according to the latest survey. Provisional Euro-zone inflation fell to 2.1% in November from 3.2%.
The weak industrial and inflation data reinforced expectations of lower interest rates and Bundesbank member Weber maintained his recent dovish conversion with a comment that there was ample room for further interest rate cuts.
The European Commission indicated that there would be a fiscal stimulus of EUR200bn while markets priced in an ECB rate cut of at least 0.50%.
The dollar was generally weaker against European currencies over the week and the Euro tested levels above 1.30 for the first time in three weeks, but the US currency recovered from its weakest levels.
The yen proved generally resilient over the week even though there were robust gains for global stock markets and it consolidated near the 95 level. Fears over the regional and global economy continued to provide some underlying support to the Japanese currency and there was further speculation over derivatives-related currency buying.
The latest UK lending data continued to indicate a weak market with a decline in BBA mortgage approvals of over 50% for the year with monthly approvals falling slightly to 21,600 from 23,400 the previous month. The Nationwide data recorded a slower rate of house-prices decline of 0.4% for November with a 13.9% annual fall.
Bank of England Governor King was generally downbeat over the economy in testimony to the Treasury select committee and stated that the bank would take all action necessary to meet the inflation target. King also warned that further action would be taken if the banks failed to boost lending while he also warned that there could be further severe stresses within the sector.
The government also repeated warnings over banks in the pre-budget report. The Chancellor announced a 2.5% VAT cut for the next 13 months as part of a GBP20bn package to support the economy, but also announced medium-term tax rises.
Sterling found support below the 1.50 level against the dollar and pushed to a high of 1.55, but was unable to sustain the advance. The UK currency pushed to a two-week high on a trade-weighted basis as risk appetite was slightly firmer.
The latest Swiss UBS consumption index recorded a further decline to 1.32 in November from 1.64 the previous month while the KOF business confidence index dipped to -0.05, the first negative reading for over five years. National Bank member Hildebrand reported that there was a severe economic crisis with GDP contraction likely for 2009.
The franc remained on the defensive against the Euro over the week with lows beyond 1.55 before some stabilisation. There were net gains against the dollar after recent steady losses and it consolidated around the 1.20 level.