Markets again struggled for direction during much of the week as major uncertainties persisted. A rise in the Chinese PMI indices for January, allied with further government measures, underpinned confidence. The actions of policymakers also remained under close scrutiny over the week. There were some signs that recent trading patterns were breaking down as the Euro and yen tended to weaken together.
The US ISM index for the manufacturing sector was slightly stronger than expected with an increase to 35.6 in January from 32.9 the previous month, the first increase since June. The orders component improved, but the employment index was unchanged at an extremely weak 29.9. Similarly, the services-sector index recovered slightly to 42.9 from 40.1, with the employment component weakening.
There was significant US labour-market data with the latest ADP employment report recording a further 522,000 decline in employment for January following a revised 659,000 drop the previous month. The Challenger group data also reported that layoffs were at a 7-year high. Jobless claims rose to 626,000 in the latest week from a revised 591,000 increase the previous week and this was a fresh 26-year high. The string of weak releases maintained expectations of a very weak monthly payroll report. In the event, non-farm payrolls declined by a further 598,000 in January, the sharpest decline for 34 years, while unemployment rose to 7.6% from 7.2%.
Pending home sales rose by 6.3% in December following a revised 3.8% decline the previous month and this had some positive impact on market confidence. There was also some optimism that a further round of government-backed policy action would help stabilise conditions in the global economy. The fiscal stimulus package was approved in the House of Representatives, but there were difficulties in the Senate with demands for the spending commitments to be scaled back.
The Federal Reserve announced that the emergency swap facilities would be extended for a further six months while there was a small increase in Libor rates which suggested that there were still important underlying tensions in the credit markets.
German retail sales fell 0.2% December in December while Euro-zone sales were unchanged over the month to give a 1.6% annual decline. The German industrial data remained extremely weak with a 6.9% decline for December.
The ECB left interest rates on hold at 2.0% following the latest ECB council meeting which was in line with market expectations. In the press conference, Chairman Trichet was generally downbeat over the economic outlook with a warning over an extended downturn while he also stated that inflation pressures had weakened further.
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Trichet gave a very clear hint that rates were likely to be cut again at the March meeting, but there was some confusion as he appeared to retract comments which suggested that rates would be cut by 0.50%. Nevertheless, markets expected a cut in rates to a record low of 1.50% and confidence remained weaker. The US currency gained some support on hopes that the economic deterioration was slowing with the Euro dipping to below 1.28 before regaining some support later on Friday. The dollar edged above 1.17 against the Swiss currency. The Canadian currency weakened to lows beyond 1.25 after a very weak unemployment report as employment fell by 129,000.
The yen was trapped in narrow rages against the dollar for much of the week before weakening sharply on Thursday with lows beyond 92.0. There was no evidence of speculation despite pressure for action and the yen consolidated around 91.20 before weakening after the US payroll data.
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The UK PMI index for manufacturing rose to 35.8 from 34.9 the previous month which provided some slight relief, although it still indicates a sharp contraction for the sector. The other PMI indices posted similar results with the services sector index rising to 42.5 from 40.2. There was also a surprise increase in the Halifax house-price index for January, the first increase for 13 months.
The Bank of England cut interest rates by a further 0.50% to 1.00% at the latest MPC meeting, in line with market expectations, and took rates down to a fresh record low.
In the statement following the decision, the bank referred to the risks of inflation substantially undershooting the 2.0% target while the outlook for consumer spending was weak and the global economy faced a major slowdown. The bank, however, also pointed to the stimulatory effect of substantial interest rate cuts while warning that Sterling weakness would push import costs higher.
Sterling maintained a generally firmer tone over the week. There was further evidence of a correction from over-sold conditions while the there was also some reassessment of Sterling’s prospects given the European stresses. Selling pressure on the UK banking sector also eased which boosted sentiment. The UK currency pushed to highs above 1.47 against the dollar and a two-month high beyond 0.87 against the Euro.
