Markets brush off US economic contraction


Published — Thursday 31 January 2013

Last update 31 January 2013 4:01 am

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LONDON: Markets brushed aside news that the US economy shrank in the final quarter of 2012 for the first time in over three years as the decline was largely due to a huge fall in national defense spending.
The Commerce Department reported that the US economy shrank by an annualized rate of 0.1 percent in the fourth quarter. That was way down on the 1.1 percent growth that analysts had been expecting, even factoring in the impact of Hurricane Sandy. It also contrasted sharply with the 3.1 percent growth rate recorded in the previous three-month period.
The market impact of the figures was minimal as analysts pointed to the fact that the fall was due to a 22.2 percent slump in defense spending, which sliced around 1.3 percentage points off growth. Had defense spending not fallen off a cliff like that, the outcome would have been more or less in line with expectations.
“Frankly, this is the best looking contraction in GDP you’ll ever see,” said Paul Ashworth, chief US economist at Capital Economics. “This isn’t the start of a new recession.”
In Europe, the FTSE 100 index of leading British shares was down 0.1 percent at 6,332 while Germany’s DAX fell 0.4 percent to 7,817. The CAC-40 in France was 0.3 percent lower at 3,773.
Wall Street was poised for modest losses at the open, with both Dow futures and the broader S&P 500 futures down 0.1 percent.
The focus will likely remain on the US. all day ahead of the Federal Reserve’s first policy statement of the year, which could indicate a shift in its monetary stance.
The Fed has operated a super-easy and super-cheap monetary policy since the financial crisis started in 2007, but there is a growing expectation that it may be tempted to reverse its position sometime this year.
The Fed’s statement following a two-day meeting, due after European markets close but bang in the middle of the US trading session, will be closely monitored.
The Fed said that as long as inflation remained modest, it could keep short-term rates near zero until the unemployment rate dips below 6.5 percent from the current 7.8 percent. That could take until the end of 2015, the Fed said.
The US is at the center of this week’s economic newsflow, which culminates Friday with Friday’s nonfarm payrolls data for January.
A report from private payrolls firm ADP did little to alter expectations of the Friday’s official report. Though it said a higher than anticipated 192,000 private jobs were created in January, it also revised the December increase to 185,000 from 215,000, meaning the overall increase was more or less in line with expectations.
Despite all the news out of the US, the dollar was largely trading where it was for most of the day. The euro was 0.4 percent higher at $1.3537 while the dollar rose 0.4 percent to 91.17 yen.
Earlier in Asia, Japan’s Nikkei surged 2.3 percent to 11,113.95, its highest closing since late April 2010, as the yen continued to weaken against the US dollar. The dollar was 0.6 percent higher at 91.34 yen.
Hong Kong’s Hang Seng rose 0.7 percent to 23,822.06. South Korea’s Kospi rose 0.4 percent to 1,964.43 after the government said manufacturing output rose 0.8 percent in December from November.
Oil prices were steady too with the benchmark New York rate down 5 cents at $ 97.52 a barrel.

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