This was a big week in terms of economic news. The market was waiting eagerly for news on inflation, retail spending as well as the housing market to see whether the US would be headed into recession and also as a gauge as to how much interest rates may be cut in the US when the Federal Reserve meets at the end of the month.
Inflation was stronger than expected in December with core prices rising to 2.4%. Retail sales were bad. Retailers are having their toughest year since 2002 with spending contracting in December.
Merrill Lynch posted a larger than expected $9.8 billion loss for the 4th quarter.
In Japan, more signs that the US slowdown is impacting globally with Machine orders for November slowing down on fears that the US slowdown will spread and hurt Japanese exports.
The Australian economy still looks strong. Jobs numbers showed that unemployment fell down to 4.3% with a rise of 20,100 jobs in December.
China is still looking strong. Chinese exports remained in strong demand. In 2007, China’s trade surplus rose almost 50% to a new record. The jump comes even with all the negative publicity from safety concerns about Chinese products. The record high house prices in China showed no sign of slowing down with another 10.5% jump in December.
In the UK, jobless claims dropped more than expected in the month of December with earnings staying essentially the same.
The Euro-Zone inflation numbers showed that the rise in energy costs and hence food costs saw higher inflation for 2007. The December inflation numbers showed a drop from the previous month due to the fall in oil prices in that period.
Unemployment in England fell to its lowest level in more than 30 years.
The world’s 2nd biggest mining company, Anglo American has offered $5.5 billion for two iron ore mines owned by Rio de Janeiro based MMX Mineracao e Metalicos. Iron ore prices are predicted to continue to increase in 2008, stimulated by strong demand from China.
The market seems convinced that the US is going into recession. Certainly the economic data was far from positive but it’s the big losses from the financial stocks that remain of concern. There is concern that there are more surprises in store and until it becomes clear the extent of the problems in the US, markets will continue to react to every piece of bad news.
Global markets followed the US market lower. Even commodity prices decreased as market players scrambled to cover margin calls. Fed Fund futures are now pricing in a 40% chance of a 0.75% cut to interest rates when the US Federal Reserve meets at the end of the month.
This is a time for investors to go into defensive mode. Utilities and healthcare are the usual defensive sectors. These stocks will most likely also fall but not as much as the market as a whole. Once the market does start to improve it could be a time for buying, but until the market shows any signs of turning around it would probably be wise to wait for prices to become even cheaper before buying back in.
Remember the stock market is usually a leading indicator of what the economy is going to do. Until the US economy looks like its showing some signs of life, the market will continue to be nervous about the future profitability of companies.
Head of Fundamental Analysis
HUBB Financial Group