EU improvement is not reflected in markets yet

The improvement in Europe's financial markets has not yet been reflected in the real economy. Economic data regarding the Eurozone continues pointing to the recession prevailing in the continent, and expectation surveys indicate the further contraction expected. However, the deterioration recorded in these surveys has recently stopped, along with the sharp decline in the probability for the Eurozone's dissolution. The essentials of the data published were the following:

• The Eurozone unemployment rate continues to soar to new heights and rose in December to a rate of 11.8%.
• A sharp decline in German exports and imports in November (-3.7% and -3.4% respectively).
• A second consecutive monthly increase in the Eurozone's Economic Sentiment index. We'll note that the low level still indicates the expectation for further deterioration of the European economy.

Despite the recession, the debt yield of peripheral countries continued to fall sharply. The ten-year bonds yields in Spain and Italy fell by about 17 basis points and 13 basis points respectively. The ten-year bond yield in Spain fell this week to below the 5% threshold for the first time since March 2012. Among the reasons which supported further yield declines we note the Japanese finance minister's message that Japan will start buying European bonds (which will be issued by the ESM, European Stability Mechanism) and other Euro denominated sovereign debt, as part of the new government's strategy to weaken the Japanese yen while supporting the European economy.

Last Thursday, during the press conference following the rate decision, chairman of the ECB, Mario Draghi, said that the decision to leave the interest rate unchanged was received unanimous, as opposed to the differences that arose among the members of the committee in the previous interest rate decision, that the debt crisis continues to subside, and that the deterioration reflected in the leading indicators has stopped. Draghi noted that the positive developments in the financial markets are not yet reflected in the real economy, and that the growth forecast's risk is that it still tends to the downside. We note that towards the weekend the Euro strengthened (against the dollar) in light of the decline in the probability for an interest rate cut in the Eurozone in the coming months.

Improvement in the U.S. and China

Economic data from last week regarding the U.S. economy reveals a relatively sharp rise in the U.S. trade deficit in November, a fact that will detract from the U.S. GDP in the fourth quarter. There was a sharp decline in  exports in October, that increased in November by 1.0%, to a level indicating an annual increase of 3.3% (vs. an annual pace of +1.2% in October). Imports rose sharply in November by 3.8%, and increased annually by 2.5% (vs. an annual pace of -0.7% in October).

In China: the CPI (Consumer Price Index) rose by 2.5% in the past year, compared to an annual pace of 2.0% in November and slightly above expectations. On the other hand, the PPI (Producer Price Index) fell by 1.9% in the past year. In the Bottom line, it seems that inflation in China is stable and relatively low.
In addition, we note positively that the higher than expected increase in the Chinese exports and imports gave financial markets hope that the trend of moderation in the rate of Chinese economy's growth has stalled, and that in the near future the growth rate will reaccelerate. Chinese exports rose over the past year by 14.1%, compared to annual increase of 2.9% in November, and Chinese imports rose by 6.0% compared with annual stability recorded in November.

Economic releases and events of the week

Monday: Eurozone Industrial Production, expectations for slight increase 
Tuesday: N.Y Empire State Manufacturing Survey, U.S. Retail Sales
Wednesday: U.S. Industrial Production (expectations for slight increase), U.S. Federal Reserve Releases Beige Book 
Thursday: Philadelphia Fed Business Outlook Survey (expectations for a slight increase to a level of 5.6), U.S. Housing Starts, U.S. Building Permits for December 
Friday: Collection of important data regarding the Chinese economy, University of Michigan Survey of Consumer Confidence Sentiment for December