Week in Review
Global equities slumped towards the end of last week after enjoying two successive days of gains. A pivotal event occurred last Friday when the US Department of Labor disclosed its vitally important jobs report for December. Although at first sight the released figures appeared very impressive; investors became progressively more disturbed after reviewing the supplied data in more detail. Specifically, US employers created 252,000 new posts last month surpassing analysts’ expectations 0f 240,000. However, this bullish catalyst was countered by a significant decline in wages, which subsequently forced stock prices to crash lower. As such, the leading US indices plunged last Friday epitomized by the Dow Jones Industrial Average plummeting by slightly over 170 points; the S&P500 dropping by nearly 18 points and the NASDAQ falling by 32 points.
Investors were definitely perturbed last Friday when a US labor report revealed numerous conflictions. On a positive note, over 200,000 new jobs have now been created during the last eleven consecutive months. In addition, the stellar performance registered in November was revised even higher to just over 353,000. An improvement in the Jobless rate was also posted, which slipped lower to 5.6% to record a 6.5 year low.
However, a deeper study of this report revealed that not everything was so rosy in the garden. Average hourly earnings crashed by 0.2% to register their largest decline in over eight years. This worrisome deterioration emphasized a disturbing underlying trend that has now been in existence since the start of the 2007/2008 financial crisis. Essentially, earnings have risen during that period at a very weak pace exemplified by climbing just 1.7% during 2013. Such a lackluster performance reveals why so many US workers are currently struggling badly despite the impressive job growth registered throughout last year.
Last Friday’s report identified another troublesome feature by verifying that the US labor participation rate had slumped to a 36 year low after falling to 62.7%. Economists were unquestionably disappointed to discover this fact since this key parameter tracks the percentage of working age Americans who are either currently employed or actively seeking work.
Although a number of key indicators contained within the US labor report were definitely not positive, analysts still assess that the US Federal Reserve will not alter its present plan of action. Specifically, they expect the US Central Bank to stick with its guns by instigating its first interest rate hike about June of 2015. Nevertheless, investors were certainly not of the same opinion last Friday prompting them to drive equities lower.
What to Expect This Week
A spate of potentially market-moving economic data will be published during the course of this week.
On Tuesday, the United Kingdom will publish key inflationary indicators for December, which are expected to report sharp declines. For example, the Consumer Price Index is forecasted to drop from 1% to 0.7% to probe lows last seen in 2000. If such predictions are confirmed, then Sterling will come under extensive pressure from the other major currencies.
The Eurozone will disclose its Industrial Production figure for November on Wednesday. Analysts are presently favoring a ‘no change’ verdict although the risks are to the downside following the recent positing of weaker-than-expected German factory orders for November. Later in the session, the European Court of Justice will deliver its eagerly awaited legal opinion on the Outright Monetary Transactions (OMT) of the European Central Bank (ECB). This deliberation is vitally important as it could have a significant impact on whether the ECB can legally implement new monetary easing policies later this month in order to counter the persistent threat of deflation.
Also on Wednesday, the USA is scheduled to present its Retail Sales for December. This indicator should confirm that the key Christmas period was a disappointment by registering a minor increase of just 0.3%, excluding gas and automobiles. If validated, then such an outcome could drag the US Dollar downwards across the board. Japan will close the day by announcing its Machine Orders for November, which will be its pivotal publication for this week. Economists are favoring a monthly rebound following a weaker-than-expected performance during November although the annual rate should continue to weaken.
The Eurozone will declare its Trade Balance for November on Thursday. Trade surplus should extend its gains during that month from 19.4bn euro to 20bn euro. Any surprise to the upside will provide the single currency with a much needed boost.
The USA will publish vitally important inflationary data on Friday which could greatly influence whether the US Federal Reserve will stick to its current future guidance strategy. The Consumer Price Index is forecasted to slump to 0.3% during December, primarily as a result of declining oil prices. The Fed will focus particularly on the core rate of inflation (minus food and oil) which should remain steady at 1.8%. However, any downside surprises could encourage the Fed to reconsider its options, which could hurt the US Dollar. Finally, the USA will close the week by releasing a key consumer confidence index. Although this parameter is expected to rise, recent poor wage data has now increased the downside risks.