After a holiday period which was strongly influenced by position adjustment and year-end flows, conditions within the US and global economy were a very important focus over the first full trading week of 2009 as the data remained generally bleak.

The US ADP employment report was extremely weak with a reported decline in private-sector jobs of 693,000 for December after a revised 476,000 decline the previous month. The ADP has revised its methodology in an attempt to match the BLS monthly payroll report more closely and this is likely to have pushed the job loss estimate higher with the November figure revised sharply higher.


Initial jobless claims were again lower than expected in the latest reporting week, but there was a surge in continuing clams which suggested the employment market was still very weak and employment fears were a key focus. There was a 524,000 decline in non-farm payrolls for December while unemployment rose to 7.2% from 6.7%.

The FOMC minutes from December’s policy meeting were notably downbeat. Members saw substantial downside risks to the economy with GDP set to contract for 2009 while some favoured quantitative reserve requirements and saw a risk of uncomfortably low inflation. The minutes reinforced expectations of a highly expansionary Fed policy over the next few months.

The Congressional Budget Office (CBO) stated that the budget deficit for the current fiscal year was likely to exceed US$1trn which will reinforce the huge financing issues which will be faced by the US over the next year at least. President-elect Obama pledged a fiscal stimulus package of at least US$800bn including tax cuts.

After strong gains during December, notably against Sterling, the Euro was subjected to significant selling pressure on the crosses over the week and this also dragged the Euro down against the dollar with lows near 1.33 before a recovery. Despite an advance against the Euro, the dollar was slightly weaker on a trade-weighted basis, although was resilient after the payroll data.

The flash Euro-zone consumer inflation estimate weakened to 1.6% for December from 2.1% and compared with a forecast decline to 1.8%. The sharper than expected reduction in inflation reinforced expectations of further ECB interest rate cuts and a significant reduction at the January meeting.

German unemployment rose in December, the first increase for three years, while there was sharp decline in industrial orders for the second successive month with a 6.0% drop to give an annual decline of over 15%

There have been more dovish comments from ECB members with Papedemos, for example, that deflation must be avoided while bank Chairman Trichet stated that there had been significant deterioration in the real economy. Nevertheless, the ECB appeared reluctant to sanction an aggressive near-term interest rate cut following the substantial cuts seen over the past three months.


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The Japanese currency weakened sharply at the beginning of 2009 with the dollar pushing to highs above 94.50 while the yen lost ground on the crosses.

Risk tolerances strengthened during the holiday period and in the first few days of 2009, but the mood of confidence then came under renewed pressure with a sharp Nikkei decline after seven consecutive declines as global economy fears increased.

The Australian dollar pushed to a three-month high above 0.7250 against the US dollar as risk appetite improved, but the advance stalled over the second half.

After coming under very heavy pressure late in 2008, Sterling secured significant respite. Once the push to parity against the Euro stalled, there was the potential for a sharp reduction in short Sterling positions.

There were reports of merger-related capital inflows associated with the EDF purchase of British Energy, potentially in the region of GBP12bn, which helped support Sterling directly and triggered a further reduction of short positions.

The Nationwide reported a further 2.5% drop in house prices for December with a 15.9% annual decline. The services-sector PMI index was marginally higher at 40.2 in December from 40.1 previously which came as a slight relief even though it still signalled a very weak economy. Industrial output fell by a sharp 2.3% for November.

The Bank of England cut interest rates by a further 0.50% to 1.50% at the latest policy meeting which put rates at a record low. The bank statement was downbeat with warnings that credit availability had tightened further while the rate of economic contraction had intensified during the fourth quarter.

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The bank, however, also stated that rate cuts, tax cuts and Sterling weakness would provide a considerable stimulus. This raised speculation over a slower pace of rate cuts and the possibility that there could be a pause to assess developments.

The UK currency strengthened through the 0.90 level against the Euro while it also regained 1.50 against the dollar.