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Week in Review: Markets Move Modestly Higher in Quiet Week

For the week ended 27 November 2015

  • US Q3 growth upwardly revised to 2.1%
  • US consumers save rather than spend
  • Japan responds to latest recession with fresh stimulus
  • Eurozone confidence remains high
  • Taxes move Pfizer-Allergan to merge

Markets were unusually calm during this holiday-shortened week, as US economic data were modestly positive and investors seemed unperturbed by the growing expectation of a hike in short-term US interest rates in December. However, Chinese stocks tumbled Friday, as investors grew nervous over officials’ latest efforts to regulate brokers.

The Chicago Board Options Exchange Volatility Index (VIX) traded around 15, down from 20 in recent weeks. The yield on US 10-year Treasuries fell to near 2.20%. Crude oil traded just above $42 and $45 per barrel for US West Texas Intermediate and Brent, respectively, as Libya is reportedly making progress in resuming oil production and tensions eased slightly regarding Russia and Turkey.

US and global economic news

US economy grows at 2.1% pace in third quarter
US gross domestic product grew at an upwardly revised 2.1% annual pace in the third quarter, according to the US Department of Commerce. The key economic growth gauge, originally estimated at 1.5% for the July–September quarter, is still down from a 3.9% growth rate in the second quarter. The latest reading was revised higher largely because inventories grew more than first estimated. However, that could lead to a drag when inventories are drawn down in the future. Consumer spending remains a bright spot, increasing at a 3% rate.

US consumer spending barely budges
US consumers spent only 0.1% more in October than September, while personal income rose 0.4%. The personal savings rate rose to 5.6%, its highest level in nearly three years. While consumers have more money to spend, they are choosing not to.

US consumer confidence dips
The Conference Board’s consumer confidence index fell in November to the lowest level in more than a year, dropping to 90.4 from 99.1 in October. The future expectations index tumbled to 78.6 from 88.7, a two-year low, as the job market was seen less favorably.

Durable goods orders rise, business-spending gauge jumps
Orders for US durable goods rose a seasonally adjusted 3% in October after a decrease of 0.8% in September. Nondefense capital goods orders excluding aircraft, a closely watched indicator of business spending plans, increased 1.3%. The strong increase in both readings could signal a turnaround after both decreased roughly 4% through the first 10 months of 2015.

US home sales data mixed
The sale of new US single-family homes surged in October. However, existing-home sales fell, presenting a mixed view of the US housing market. Sales of new homes rose 10.7% to a seasonally adjusted annual rate of 495,000, while existing-home sales fell 3.4% to an annual rate of 5.36 million units.

Case-Shiller: House prices rise 5.5%
The S&P/Case Shiller composite index of home prices in 20 US cities increased 5.5% from a year earlier in September, up from a 5.1% year-over-year rise in August. The report signals a pickup in residential real estate and, taken with other data, is seen to support a US Federal Reserve rate hike in December.

Weekly US jobless claims fall to 260,000
Initial jobless claims fell 12,000 to 260,000 for the week ended 21 November. Initial claims have now been below the 300,000 threshold for 38 straight weeks and are close to 40-year lows. The four-week moving average was unchanged at 270,000. Continuing claims increased 34,000 to 2.21 million for the week ended 14 November.

Japan announces worker-focused stimulus
Japanese Prime Minister Shinzo Abe said he would raise the country’s minimum wage and invest in childcare and eldercare facilities to promote workforce participation as part of a ¥3 trillion ($24 billion) stimulus package aimed at jump-starting the country’s economy. It’s the second time that Japan has slipped into recession in two years. Abenomics until now has been criticized for focusing on big business, rather than the average Japanese worker.

Eurozone economic confidence remains at four-year high
A gauge of eurozone executive and consumer economic confidence stayed at a four-year high in November despite an anemic economy. Most survey responses were sent before the Paris terrorist attacks on 13 November. The results are unlikely to dissuade more stimulus action by the European Central Bank when it meets next Thursday.

German executives more optimistic
Germany’s Ifo business climate index rose to 109 in November from 108.2 in October. The subindex for expectations rose to 104.7, a third straight monthly climb. The report shows resilience and confidence despite last month’s Volkswagen scandal and this month’s deadly terrorist attack in Paris.

US and global corporate news

Pfizer, Allergan plan $160 billion merger
Pharmaceutical firms Pfizer and Allergan plan to merge, creating the world’s largest drugmaker by sales, in a transaction valued at about $160 billion. The new firm, to be located in Ireland, will be named Pfizer PLC. The deal is the latest inversion merger, enabling a US firm to move its headquarters abroad to take advantage of lower corporate tax rates. Pfizer said it expects to have an adjusted tax rate of 17%–18% from its current 25%.

The week ahead

  • China reports its manufacturing purchasing managers’ index on Monday, 30 November.
  • US manufacturing data is reported on Tuesday, 1 December.
  • The European Union reports its composite PMI on Thursday, 3 December.
  • US services sector data is released on Thursday, 3 December.
  • The European Union reports its gross domestic product on Friday, 4 December.

Stay focused and diversified
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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times;;;

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