Recession in Europe and Japan, improvement in the U.S.

The improvement in the U.S. economic data continues

Most of the data released in the past week regarding the U.S. economy were encouraging. We negatively note that the industrial production declined in January by 0.1% (versus expectations for +0.2%), however December and November data were revised upward. The Empire State manufacturing expectations survey of the New York area rose unexpectedly to its highest level in 9 months (+10.0 versus -7.8 in January). We emphasize that the positive indication from this survey is compatible to the increase recorded in the last two months in the manufacturing purchasing managers’ indices in the U.S. (ISM Manufacturing and “Markit” PMI), an evidence for the expected improvement of the American manufacturing sector in the coming months.

In reference to the American consumer, we positively note the rise in the University of Michigan consumer confidence index for February (which rose to its highest level in the last three months), the decline in the initial jobless claims, and the increase in U.S's retail sales in January. A slowdown was recorded in the volume of private consumption: retail sales rose in January by 0.1%, following an average monthly rise of 0.5% in November and December. Nevertheless, the figures are still encouraging, especially when taking into account the concern that the taxes increases (in the beginning of the year) significantly affect the volume of private consumption.

On the negative side, we shall note that an internal email of a senior in Walmart from February 12th leaked to a Bloomberg journalist last Friday. That email revealed that the net sales recorded in early February this year were the lowest in the last seven years, probably as a result of increasing the U.S. Payroll tax.

The U.S. earnings season is coming to an end (about 79% of the companies included in the S&P 500 index have already reported their results), and the summary so far points to a recovery in the U.S. business sector. Nevertheless, we note that the volume of growth in revenues (year-over-year) remained relatively moderate compared to the level recorded in late 2011 and in the first quarter of 2012.

Growth figures for the fourth quarter indicated the recession prevailing in Europe and Japan

Europe: last week's biggest news was the publication of the fourth quarter's growth data. We briefly note that a sharper than expected contraction was recorded in Germany (-0.6% in quarterly terms), France (-0.3%), Spain (-0.7%) and Italy (-0.9%). We note that the Eurozone economy shrank for the third consecutive quarter, and by the sharpest rate recorded since the first quarter of 2009 (quarterly rate of -0.6% in the fourth quarter, compared with forecasts to -0.4%). Regarding the Eurozone's future growth, the expectation surveys published in the last two months indicate a slight improvement in companies and consumers' assessments of the future growth, though the level of the expectations surveys remained relatively low, and still points to expectations for further contraction of the Eurozone economy.

Japan: the negative trend recorded in the global economy during the last quarter of 2012 affected the Japanese economy as well, which shrank, for the third consecutive quarter, to a level of -0.1% (quarterly rate) compared with a quarterly growth forecast of 0.1%. World leaders turned to the new Japanese government to stop trying to weaken the Japanese Yen, after it weakened by 15% against the dollar since early November 2012. However, the recession prevailing in Japan will probably continue to support a continued aggressive monetary and fiscal policy of the Japanese authorities, in order to accelerate the growth rate of the Japanese economy.

Emerging markets: the economic contraction recorded in most of the developed markets during the last quarter of 2012, led to the slowdown in the growth rate of emerging markets. The GDP data of Poland and Russia pointed to a more moderate pace of economic growth, while in Hungary and the Czech Republic a relatively sharp economic contraction was recorded.

Economic releases and events of the week

Tuesday: ZEW Germany assessment of current situation, NAHB Housing market Index in the U.S., Both expected to increaseWednesday: U.S. Housing Starts and U.S. Building Permits for January, Fed's Minutes from Jan. 29 Federal Open Market Committee (FOMC) Meeting, Eurozone Consumer Confidence Indicator for February, slight increase expected
Thursday: Eurozone February's Preliminary manufacturing PMI, U.S. Existing Homes Sales for January, Philadelphia Fed Business Outlook Survey for February
Friday: IFO Germany Business Climate February