Deteriorating conditions within the global economy, together with official action to provide support were very important market factors over the week as pessimism over economic conditions continued to increase.
The US PMI data remained at depressed levels with the manufacturing index falling to 36.2 in November from 38.9 previously. The prices component also weakened to the lowest level for over 50 years as commodity prices continued to weaken sharply. The services-sector fell sharply to a record low of 37.3 for the month from 44.4 previously with all the components deteriorating rapidly.
There was a further decline in auto sales for the month, illustrating the stresses within the manufacturing sector, while factory orders also continued to decline. Retail sales evidence remained weak and there were fears that consumer credit lines would be cut.
As far as employment is concerned, there was a sharp decline in private-sector payrolls according to the latest ADP report with a 250,000 decline in employment. There was some slight degree of relief in the latest initial jobless claims data with a decline to 509,000, although continuing claims were at a 26-year high. The monthly payroll report was extremely weak with a 533,000 employment decline, the sharpest monthly fall since 1974.
Fed Chairman Bernanke stated that the Fed would consider lowering interest rates further while he also suggested that it would look to intervene in the market to buy Treasury bonds in order to keep long-term interest rates down. Bernanke also suggested that public funds could be used to stem foreclosures.
In addition, the Fed also announced that the measures to boost liquidity will be extended until the end of April as money-market stresses remained high.
The impact of lower bond yields was illustrated by the latest mortgage application data with the weekly total rising by over 100% as re-mortgaging activity surged in response to a decline in Treasury yields to 50-year lows..
The final PMI data for November recorded a further decline from the flash estimates which reinforced fears over the outlook. The data for Spain was particularly depressed. Elsewhere, retail sales continued to decline according to the October data.
At the latest council meeting, the ECB cut interest rates by a larger than expected 0.75% to 2.75%, pushing the total easing to 1.75% in less than 3 months. ECB Chairman Trichet stated that growth risks were to the downside with the risk of a protracted slowdown while the staff projections for 2009 were downgraded sharply.
Trichet was still anxious to point out the need for discipline and the importance of medium-term perspective for policy while suggesting that it may be possible for the bank to make asset purchases outright.
Source: VantagePoint Intermarket Analysis Software
The US currency was confined to relatively narrow ranges over the week as markets fretted over the global economic outlook. The dollar pushed to highs beyond 1.26 against the Euro before losing ground and settling around 1.27 in choppy trading conditions.
The yen retained a firm tone and pushed to highs beyond 92 against the dollar while there were gains against most major currencies. The Japanese currency continued to gain support from elevated risk aversion and global economic fears. In this environment suspected institutional dollar buying failed to have a substantial impact
The Bank of Japan held an unscheduled meeting over the week. Interest rates were unchanged at 0.30% with the main emphasis on easing stresses within the corporate finance market by accepting a wider range of collateral. The Bank also announced that it would provide unlimited liquidity to ease year-end funding pressures.
The economic data remained weak with the monthly Tankan business sentiment index weakening to a 7-year low, although the data was slightly better than in the other major economies. Capital spending also fell by 13.3% in the year to the third quarter.
Source: VantagePoint Intermarket Analysis Software
The Canadian dollar was unsettled by a decline in commodity prices as well as political stresses while there was a sharp decline in employment. The Canadian dollar weakened to near 1.30 against the US currency. The central banks of Australia and New Zealand both announced further sharp cuts in interest rates with Australian rates cut by 1.0% to 4.25% while New Zealand rates were reduced to 5.00% from 6.50%. Lower metals prices undermined the Australian currency late in the week with lows below 0.63 against the US currency.
The UK economic data remained extremely weak with the PMI index for the manufacturing sector dipping to 34.4 from a revised 40.7 previously while the services sector index declined to a record low of 40.1 from 42.4 previously. Consumer lending remained at a depressed level while the Halifax house-price index recorded a further 2.6% decline in November prices to give an annual decline of close to 15%.
The Bank of England cut interest rates by a further 1.0% at the latest monetary policy meeting. This took rates down to 2.0% which was the lowest level since 1951. In the statement following the decision, the bank stated further concerns over the economic outlook with financial-sector stresses while inflation was set to decline further. The voting breakdown was not released following the meeting.
There was some speculation that the UK could look to join the Euro zone at a depressed Sterling rate against the Euro which also unsettled the currency.
Sterling remained under pressure over the week with the trade-weighted index dipping to an all-time low. The UK currency also weakened to record lows against the Euro beyond 0.87 and tested support below 1.45 against the dollar.
