The Week in Review for the week ending January 4, 2013
Investors were relieved last week as the US Congress agreed to a down-to-the-wire compromise deal on the federal budget. However, that may have merely pushed back the fiscal cliff showdown until March, when Congress will be faced with spending cuts, long-term debt reduction and a debt ceiling decision.
Monday closed the book on 2012, with the S&P 500 Stock Index’s best final-day gain since 1974. The rally accelerated on Wednesday, with major US stock indices starting 2013 with gains of more than two percentage points.
International stocks joined the New Year’s celebration. For 2012, the S&P 500 gained 13%, the Dow Jones Industrial Average advanced 7.3% and the NASDAQ Composite Index rose 15.9%. The Chicago Board Options Exchange Volatility Index (VIX) ended 2012 with a sharp drop, falling 23% for the year, the lowest level of market volatility in three years.
Manufacturing activity picked up its pace in December in China, South Korea, Taiwan and India. In contrast, eurozone manufacturers remained mired in weakness.
US jobs data, consumer confidence and auto sales were all positive. As risk tolerance rose early this week, US Treasuries lost their safe-haven allure. Treasuries sold off more on Thursday, causing their yields to rise, after the US Federal Reserve Board minutes from December indicated that the US central bank might end its $85 billion-per-month bond-buying program this year. Yields on 10-year Treasury notes rose to 1.96%, their highest level since May.
Amid this environment the DJIA was up 3.8%, the S&P 500 was up 4.6%, the Russell 2000 was up 5.7%, the Global Dow Ex-US was up 1.9% and crude oil rose 2.5%.
The US Congress’ last-minute budget deal left income tax rates unchanged for the vast majority of Americans, with only the highest 1% of income earners facing higher tax rates. Most significant among other changes to taxation for 2013 were the expiration of the temporary payroll tax reduction and the extension of unemployment benefits for one year, along with a permanent inflation adjustment to the alternative minimum tax (AMT). Congress put off decisions on automatic spending cuts originally set for January 1, 2013 until March 1, 2013, when it will have to address a plan to reduce the US federal debt and probably raise the debt ceiling.
The US economy added 155,000 jobs in December, while the unemployment rate remained steady at 7.8%, according to the US Department of Labor. The job gains were slightly lower than economists had expected, but positive trends include slightly faster wage growth and longer working hours, both of which strengthen the labor market. Overall, hiring is keeping pace with population growth but not expanding enough to reduce unemployment levels.
US economic reports maintained a positive trend, even in the face of uncertainty related to the fiscal cliff. The Institute for Supply Management’s non-manufacturing index rose beyond expectations to 56.1 in December, from 54.1 in November. The ISM manufacturing purchasing
managers’ index also improved, to 50.7 in December, up from 49.5 the previous month. The Bloomberg Consumer Comfort Index, a weekly gauge of consumer sentiment, rose to an eight-month high for the week ended 30 December. For the year, the index had its largest improvement since 1998. Retailers reported sales gains for December. In a survey of 17 apparel chains tracked by Thomson Reuters, the average chain had a 4.5% year-over-year increase in December sales.
Manufacturing activity accelerated in Asia in December. China’s official purchasing managers’ index (PMI) reading for the month was 50.6, marking the country’s third consecutive month of growth in manufacturing. The HSBC Chinese PMI survey rose to 51.5 from 50.5 in November. The HSBC PMIs for South Korea and Taiwan both rose above 50 in December, while India’s HSBC PMI climbed to 54.7 from 53.7 the previous month.
Eurozone manufacturing activity contracted in December, with a reading of 46.1 in Markit’s monthly index, down from 46.2 in November. Germany’s index fell sharply to 46.0. Ireland was the only eurozone country with monthly manufacturing growth. Activity in the United Kingdom’s services sector shrank for the first time in two years in December, pointing to a likely fourth-quarter economic contraction.
The US Federal Trade Commission found that Google had not violated antitrust or anticompetition statutes in its Web search application, a major victory for the search engine giant. However, the FTC found that Google had misused its cellphone technology patents and ordered the company to make that technology available to its rivals.
Transocean, the owner of the oil rig that exploded in the Gulf of Mexico in 2010, killing 11 workers and resulting in a massive oil spill, agreed to a $1.4 billion settlement with the US Department of Justice. The Swiss company will pay $1 billion in civil penalties and $400 million in criminal penalties, having pled guilty to a misdemeanor charge of violating the Clean Water Act. Much of the fine will fund environmental restoration and spill-prevention research and training.
US new auto sales in December grew 9.6% from a year earlier and 19% from November, according to Edmunds, the auto industry research firm. Standouts included Chrysler Group (sales up 10% year over year), Toyota Motor (up 9%) and General Motors (up 4.9%). Ford Motor’s sales climbed 1.9%. Car sales were generally much more robust than truck sales.