Week ending 5th January 2007      

The trading week was both volatile and mixed. US economic data released showed a pick up for December manufacturing activity and a larger than expected jump in December non-farm payrolls, which came in at 167,000 versus the consensus 100K forecast. Against this the minutes of the 12 December FOMC meeting were released, placing a dampener on any short term interest rate cut speculation and re-emphasising the problems of a rapidly slowing housing market whilst inflation is rising. Of the company results released this week, perhaps those of Freddie Mac, the 2nd largest source of US home loans, is worthy of a mention. ‘Freddie’ posted Q306 losses of $550m, which stemmed from $1.5bn pre-tax losses on derivatives and other assets, with ‘underdetermined’ losses for Q406. The major stock indices opened the year with an upside surge, before reversing towards the week’s end, culminating with a 0.6% fall for the Dow and the S&P 500 indices. The higher beta averages such as the Nasdaq and the Russell 2000 saw a +0.8% and -1.5% respective move.

Turning to Europe, December CPI for the Euro-zone came in at 1.9%, at the top end of the ECB’s range, whilst November retail sales advanced by 0.5%. German unemployment fell to 9.8% in December, the largest fall since re-unification in 1990. Money supply in the UK was recorded at a hefty 13% annualised during November, whilst the latest consumer credit figures and mortgage approvals were at a 3 year high. Contrary to the recent buoyant housing data out of the Nationwide, the countries largest lender, the Halifax, reported a 1% fall for average house prices in December. The main bourses followed the trend of Wall Street, with the FTSE 100 lower by a smidgen, -0.01%, as was the German Dax at -0.06%, whilst the French CAC fell by 0.4%.

Out East, Chinese banks were told to set aside more reserves, whilst 2006 economic growth for Singapore accelerated to 7.7% after 2005’s robust 6.4%. Japanese vehicle sales for December fell by 7.2%, whilst South Korea saw exports surge by 13.8% from a year earlier. Japan’s Nikkei fell by 0.8%, whilst the Hang Seng gained 1.2%.

On the currency front, it was a good week for the $US index and Government Bonds joined in with the volatility increase witnessed within their equity brothers. US 5 and 10 year treasury yields ended the week lower by 1.1% and 1.4% respectively.

The commodities complex was even more volatile, as the $Oil price fell by a near 8% to $56.3 a barrel and the price of copper fell by 12%. These two are now lower by 30% and 40% since their May 2006 highs. The precious metals complex also joined the ‘fun’ with gold and silver falling by 5% each over the first trading week of 2007.

Next week sees the first central bank meeting of the ECB and the Bank of England’s MPC, both under pressure to raise interest rates, whilst the latest trade data is released for the US and the UK. Retail sales and consumer credit numbers will be closely followed for both countries, as will the Q306 Euro zone GDP figure.

George W is due to speak on his plans for Iraq, no doubt including his recent plan for a 20-40,000 extra troop surge. Elsewhere, Fed chief, Ben Bernanke gives his first speech of 2007, with his chosen subject as “The Fed’s Role in a Crisis”. We wonder on the timing of his chosen topic.

“Lying is just a way of hiding the truth”

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