The Week in Review for the week ending March 1, 2013
Market volatility rose sharply after Italy’s weekend election results left a deep split in its government. The prospect of greater instability in the eurozone’s third-largest economy caused Italian and Spanish bond yields to spike and global stocks to plunge.
However, European and US central bank reassurances calmed markets. The US budget impasse, and the deep, across-the-board budget cuts that begin March 1st, added to investor anxiety. US economic reports remained primarily positive, with fourth-quarter US gross domestic product revised up above the growth threshold.
In addition, housing data was strong, consumer confidence rose, and ongoing jobless claims dipped to their lowest level in close to five years.
Amid this environment, the DJIA was up 0.6%, the S&P 500 was up 0.2%, the Russell 2000 was down -0.2%, the Global Dow Ex-US was down -0.2% and crude oil dropped -2.6%.
Last weekend’s Italian elections appear to have led to a political stalemate. Voters rejected the austerity programs of Prime Minister Mario Monti. However, former Prime Minister Silvio Berlusconi’s center-right coalition’s strong showing could prevent the country’s left-wing coalition from effectively governing the country. The 25% of popular support that a protest party led by a comedian garnered reflects the serious challenges ahead as the eurozone struggles to escape its multiyear debt crisis and widespread recession. Creditor nations, including Germany, are finding it difficult to impose austerity measures on debtor nations, including Italy, Spain, and Greece.
Despite improved economic and business confidence in the eurozone, the regional economy contracted in February, indicating a likely fourth consecutive quarter of contraction. Unemployment in the eurozone rose to a record 11.9% in January. The European Commission predicts unemployment rates of 12.2% this year and 12.1% in 2014. Youth unemployment is at 24.2% across the region and has reached 55.5% in Spain.
The forced across-the-board US budget cuts of $85 billion from March through September, split between defense and nondefense spending, will extend across 1,200 different federal programs, including the areas of housing, education, transportation, energy, labor, justice, and health. Medicare providers will face a 2% cut in payments. Unless a deal is reached, the Pentagon will have to cut 13% of its budget over the next seven months, while most non-defense programs will face a cutback of 9%. One million civilian employees could be forced to take unpaid leave of one day a week, possibly beginning in April. Still ahead looms the March 27th deadline, when current funding for a number of federal programs will run dry.
Weekly first-time jobless claims for the week ended February 23rd fell 22,000, to 344,000. The number of continuing unemployment benefit claims fell 91,000 to 3,074,000, the lowest level since June 2008. The US housing market continued to strengthen in December and January, based on data released this week. US new home sales increased 15.6% in January from December to the highest seasonally adjusted annual rate since July 2008. Prices of single-family
homes rose an average of 6.8% year over year in December, according to the S&P/Case Shiller composite index. US gross domestic product was revised higher in the fourth quarter, resulting in a marginal 0.1% growth rate rather than a 0.1% downturn. The revision mainly reflects higher figures for nonresidential fixed investment, which grew 11.2% in the quarter. Consumer spending rose 2.1%. However, government spending dropped by 6.9%. A separate report showed that household debt rose 0.3% in the fourth quarter, the first such increase since 2008, reflecting rising consumer confidence. Consumer spending rose 0.1% in January, despite the increase in payroll taxes, according to a US Department of Commerce report.
Orders for US durable goods excluding transportation rose 1.9% in January from December, while capital goods excluding defense and aircraft, used as a gauge of business investment, climbed 6.3%. Because of a 70% decline in orders for defense equipment, the sharpest drop in more than a decade, overall durable goods orders slumped 5.2% in January. The US manufacturing sector grew in February at its fastest pace since June 2011, according to the ISM manufacturing index, which rose to 54.2. Household spending in Japan rose 2.4% from a year earlier in January, exceeding expectations, while the country’s unemployment rate dipped to 4.2% from 4.3% in December. The reports indicate positive early results from the Japanese government’s recent stimulus efforts.
The United Kingdom’s manufacturing purchasing managers’ index fell to 47.9 from 50.5 in January, indicating a return to contraction. Britain’s Health and Safety Authority delayed its decision on whether French energy firm Total could resume production at a North Sea gas field. The delay could add further to the country’s economic slump.
Freddie Mac, one of two government-controlled companies that bolster the US residential mortgage market, posted a record $11 billion annual profit for 2012, its first profitable year since 2006. The firm lost $5.3 billion a year earlier. Freddie Mac and sibling Fannie Mae currently back nearly two-thirds of all US mortgages and together received $159.1 billion in bailouts from the US Department of the Treasury.
Spanish bank Bankia posted a record net loss of €19 billion ($25 billion) for 2012 after cleaning its balance sheet of bad property loans and other loss-creating operations. The largest of several ailing Spanish banks that were nationalized in 2012, Bankia is planning to cut 4,500 jobs, shut 1,000 branches, stop its real-estate lending, sell industrial operations, and focus on retail banking.
JPMorgan Chase, the most profitable US bank in 2012 and the country’s biggest lender by assets, announced it would cut 17,000 jobs globally over two years, with most of the cuts aimed at its consumer bank, largely in its mortgage banking unit. The banking giant employed close to 259,000 people at year-end and had annual net income of $21.3 billion, a company record. Rival bank giants Bank of America and Citigroup previously announced job cuts totaling 30,000 and 11,000, respectively, as they sought to boost profitability in a slow-growth economy.