The Week in Review for the week ending January 18, 2013
The top news from last week included China’s economic growth rising to 7.9% in the fourth quarter and US housing and weekly jobless reports improving, with both cresting multiyear thresholds, and inflation remaining contained.
The eurozone remained the weak link, with Germany’s economy contracting in the fourth quarter and the region’s overall industrial output contracting in November.
Corporations have maintained profitability, according to early quarterly earnings reports. Overall, 71% of the first 52 Standard & Poor’s 500 Stock Index companies beat expectations. However, quarterly profits grew at an estimated 2.5%, the second-slowest pace since 2009.
For the week, global stock indices rose modestly but broadly. The Dow Jones Industrial Average and S&P 500 had their third-straight week of gains.
Amid this environment the DJIA was up 1.2%, the S&P 500 was up 1.0%, the Russell 2000 was up 1.4%, the Global Dow Ex-US was up 0.1% and crude oil rose 2.1%.
As mentioned, Chinese gross domestic product expanded by 7.9% year over year in the fourth quarter, confirming reports in recent months that the world’s second-largest economy’s rate of growth is accelerating. China’s easing growth — 7.4% in the third quarter — had been a growing concern. The pickup in activity came in response to increased Chinese government spending on infrastructure projects and the central bank’s loosening of liquidity halfway through 2012. The impact is expected to be felt globally, as China is projected to have steady growth in 2013, giving support to exporters of the raw materials that China consumes at a rapid pace.
US home prices had their largest year-over-year increase in six years in November. The number of homes that were “underwater” — those for which the balance due on the mortgage exceeded the home’s value — fell almost 4 million in 2012 to 7 million. Homebuilder sentiment rose in January to its highest level since April 2006, as gauged by the NAHB/Wells Fargo Housing Market Index. December housing starts rose 12.1%, according to the US Department of Commerce.
Fewer US workers applied for initial unemployment insurance benefits in the week ended January 12th than for any week since January 19, 2008. Applications fell to 335,000, a drop of 37,000 from the previous week. However, 2.7% more people continued to collect jobless benefits (3.2 million in all) in the week ended January 5th, and the number of people who have used up their traditional benefits and are collecting emergency and extended benefits increased 3.3% to 2.06 million in the week ended December 29th.
US inflation remains under control, with December’s index of consumer prices unchanged after falling 0.3% in November. Core prices, stripping out food and energy prices, rose 0.1%. Year over year, consumer prices were up 1.7% and core prices rose 1.9%. A separate report indicated that producer prices slipped 0.2% in December and rose just 1.3% for the year. Retail sales increased 0.5% in December, according to the US Commerce Department. US consumer
confidence, as measured by the Thomson Reuters/University of Michigan index of consumer sentiment, fell to a one-year low in January.
The German economy contracted in the fourth quarter of 2012, according to an official estimate from the country’s statistical office. However, the slump could be brief. Recent surveys show increased business confidence, and German exporters are likely to benefit from US and Asian economic growth. For all of 2012, German GDP grew 0.7%, after adjusting for inflation, and exports rose 4.1%, while a record-high 41.6 million were employed. Eurozone industrial output fell in November at its sharpest rate in three years, shrinking 3.7% from a year earlier, reported Eurostat, the official European statistical office.
Japan’s machinery orders increased 3.9% in November from October, more than expected. Economists expect the country’s recession to be brief, particularly with the Japanese government having already introduced a ¥10.3 trillion ($116 billion) stimulus package, which could lead to 3.5% annualized growth in the second quarter of 2013, according to Nomura Securities.
JPMorgan reported a record profit of $5.7 billion for the quarter, up 53% from a year earlier. JPMorgan’s revenue rose 10% for the quarter, but was close to flat for the full year. Bank of America reported a 63% drop in fourth-quarter earnings, weighed down by billions of dollars in mortgage-related charges. Its profit of $732 million declined sharply from almost $2 billion a year earlier. Included in the bank’s fourth-quarter earnings report was a $2.7 billion pretax charge related to an $11.6 billion settlement it made with Fannie Mae over suspect underwriting and other missteps made by Countrywide Financial, which it acquired in 2008. Bank of America also took $2.5 billion in pretax charges tied to foreclosure reviews, litigation related primarily to mortgages and other mortgage-related issues. Revenue declined 25%, as noninterest income plunged 41%. Goldman Sachs reported a threefold jump in earnings from a year earlier in the fourth quarter of 2012. Goldman benefited from strong results in trading and investment banking as well as cost cutting. Its annual return on equity was 10.7%, up from 5.8% in 2011.
Intel felt the pain of a sharp drop in demand for personal computers, as its earnings fell 27% in the fourth quarter despite new hardware and software products. Like Dell, Intel is being hurt by the shift in consumer spending to smaller mobile devices. Intel is trying to adapt by placing its chips in tablet products and encouraging PC makers to produce thinner laptops.
Morgan Stanley swung to a quarterly profit on strong revenue from its institutional securities group. Citigroup’s fourth-quarter profit rose more than 25% despite legal charges, a write-down on the value of its debt and a $1 billion charge to cover more than 11,000 layoffs announced late last year.
Giant asset manager BlackRock announced a 24% growth in profit, a 12% increase in its quarterly dividend and expansion of its share repurchase program.
General Electric posted a 7.5% growth in fourth-quarter earnings on a wider operating margin and improved profits in a number of its businesses, including its financial subsidiary, GE Capital, and its energy infrastructure and aviation businesses. Overall revenue rose 3.6%.