Fed maintains monetary policy as US economy shrinks

The US economy unexpectedly shrank in the fourth quarter, contracting at a 0.1 percent annual rate, according to a report on Wednesday. The contraction was mostly attributed to a decline in government outlays and a smaller gain in inventory.

In contrast, consumer spending grew at a 2.2 percent annual rate, up from 1.6 percent in the previous quarter. Residential construction grew at a 15.3 percent rate.

Adding to signs of underlying growth in the US economy, data from ADP on Wednesday showed that companies took on 192,000 employees in January, up from 185,000 in December.

Indeed, the Federal Reserve left monetary policy unchanged on Wednesday, noting in its statement following its latest monetary policy meeting: “Growth in economic activity paused in recent months in large part because of weather-related disruptions and other transitory factors.”

Meanwhile, economic data from Europe on Wednesday were mixed.

Spain’s recession deepened in the fourth quarter as gross domestic product fell 0.7 percent, worse than the previous quarter's 0.3 percent decline.

However, economic confidence in the euro area improved in January, with the European Commission's economic sentiment indicator rising to 89.2 from 87.8 in December.

There were also positive economic data from the UK. Home loan approvals rose to 55,785 in December, the highest since January 2012, from 54,011 in November. Net mortgage lending increased by 1.036 billion pounds in December, the largest amount since April.

Global economic data mixed, India cuts rates

US economic data on Tuesday were mixed. The S&P/Case-Shiller index of home prices increased 5.5 percent in November from a year ago, the biggest gain since August 2006. However, the Conference Board's consumer confidence index plunged to 58.6 in January from 66.7 in December.

The latest Japanese economic data have also been mixed. A report on Tuesday showed that the small business confidence index increased to 44.3 in January from 43.8 in December. A report on Wednesday showed that retail sales rose 0.4 percent in December from a year earlier, slowing from a 1.2 percent rise in November.

Meanwhile, Germany is continuing to provide positive data. GfK reported on Tuesday that its consumer confidence index for Germany will rise to 5.8 in February from 5.7 in January.

Also on Tuesday, India's central bank cut interest rates for the first time in nine months. The Reserve Bank of India lowered its benchmark repo rate by 25 basis points to 7.75 percent. It also cut its cash reserve ratio by 25 basis points to 4.0 per cent.

US durable goods orders rise

US economic data on Monday were mostly positive.

Durable goods orders rose 4.6 percent in December, the fourth consecutive monthly increase. Excluding transportation equipment, orders increased 1.3 percent. Orders for non-defense capital goods excluding aircraft increased 0.2 percent.

Pending home sales fell 4.3 percent in December, the first decline since August. However, the lower sales were mainly attributed to supply limitation. Bill McBride says that the “key for sales is that the number of conventional sales is increasing while foreclosure and short sales decline”.

Finally, the Dallas Federal Reserve reported that its manufacturing production index for Texas rose to 12.9 in January from 3.5 in December while its general business activity index rose to 5.5 from 2.5.

Meanwhile, however, in the euro area, data on Monday showed that loans to the private sector fell 0.7 percent in December from a year ago. M3 money supply grew 3.3 percent in December from a year ago, down from 3.8 percent growth in November.

Bears capitulated yet?

John Hussman, in his latest article, said that the stock market bears are capitulating everywhere.

The bears are gone, extinct, vanished. Among the ones remaining, many are people whom even I would consider to be either permabears or nut-cases...

And capitulation is everywhere. CNBC ran a story last week “Bears on the Brink: I Can’t Fight It Anymore.” Even the normally staid Alan Abelson of Barron’s finally threw in the towel last week, abandoning his own caution that stocks have run too fast, too far...

Ironically, the CNBC story itself showed skepticism over whether the market rally is sustainable.

Still, any one of those substantial market headwinds could start blowing again on a moment's notice, worrying some that the current rally is heading for trouble...

“We are reaching capitulation levels,” said Walter Zimmerman, senior technical analyst at United-ICAP. “What troubles me is there's never been a happy ending from that combination of extreme complacency.”

Indeed, many of the metrics that gauge market sentiment are in startling territory.

And in reporting from Davos last week, Peter Coy at Businessweek said:

The hive mind of Davos has concluded that the financial crisis is done, finished. The new worry: a bubble in the credit markets.

So while there has indeed been a rise in optimism among investors and analysts, doubts over the sustainability of the current rally have not vanished.

UK economy contracts in fourth quarter

The UK economy is flirting with another recession after a report on Friday showed that it had contracted 0.3 percent in the fourth quarter.

The contraction was mainly driven by a 10.2 percent drop in mining and quarrying output that was mainly attributed to disruption from extended maintenance at North Sea oil and gas fields. Falls in factory output and the loss of contribution from the London Olympics also contributed to the contraction.

US economic data on Friday were a little weaker than usual. New home sales fell 7.3 percent in December. Still, builders managed to sell 367,000 new homes in 2012, the most in three years and the first annual increase in seven.

Meanwhile, the euro area continued to show signs on Friday that its financial crisis is abating.

The Ifo institute’s business climate index for Germany rose to 104.2 in January from 102.4 in December, the third consecutive increase.

The European Central Bank said banks will next week repay 137.2 billion euros of its emergency three-year loans, more than economists had forecast.

Global manufacturing accelerates

Flash estimates of manufacturing PMIs released on Thursday showed clear signs of improvement for the sector.

In China, HSBC's manufacturing PMI rose to 51.9 in January, the highest in 24 months, from 51.5 in December.

In the euro area, Markit's manufacturing PMI rose to 47.5 in January from 46.1 in December. With the services PMI also rising to 48.3 from 47.8, the composite PMI rose to 48.2 in January from 47.2 in December.

In the US, Markit's manufacturing PMI jumped to 56.1 in January from 54.0 in December. In other signs of improvement in the economy, initial claims for state unemployment benefits fell by 5,000 to 330,000 last week, the lowest since January 2008, and the Conference Board's leading economic index rose 0.5 percent to 93.9 in December.

There has been no joy in Japan though. On Thursday, it reported that exports fell 5.8 percent in the year to December while imports rose 1.9 percent, leaving it with a record trade deficit of 6.93 trillion yen for 2012. Today, it reported that consumer prices excluding fresh food fell 0.2 percent in December from a year earlier.

UK announces referendum on EU exit

The UK government has set the stage for it to leave the European Union. Reuters reports:

Prime Minister David Cameron promised Britons a vote on quitting the European Union, rattling London's biggest allies and some investors by raising the prospect of uncertainty and upheaval.

Cameron announced on Wednesday that the referendum would be held by the end of 2017 - provided he wins a second term - and said that while Britain did not want to retreat from the world, public disillusionment with the bloc was at "an all-time high".

While the prospect of the UK's departure from the EU creates uncertainty and could adversely affect the economy, data on Wednesday suggest that the latter is healthier than many thought.

The number of people claiming unemployment benefit fell by 12,100 last month, better than the flat reading expected. The jobless rate fell to 7.7 percent.

Average weekly earnings growth in the three months through November slowed to 1.5 percent though.

US existing home sales fall, German investor confidence jumps

US economic data on Tuesday came in slightly weak.

Existing home sales fell 1.0 percent last month to a seasonally adjusted annual rate of 4.94 million units. However, that was still the second highest rate of sales since November 2009. Inventories fell to just 4.4 months of sales, the lowest since May 2005.

Another report on Tuesday showed that the Richmond Federal Reserve bank's manufacturing index fell to -12 from 5 in December.

At the national level, the Chicago Federal Reserve's national activity index fell to 0.02 in December from 0.27 in November. However, the three-month average rose to -0.11 from -0.13.

Europe produced some positive data on Tuesday. The ZEW index of German investor and analyst expectations jumped to 31.5 in January, the highest since May 2010, from 6.9 in December. The gauge of the current situation rose to 7.1 from 5.7.

BoJ adopts 2% inflation target

The Bank of Japan made its much-anticipated announcement today on the adoption of a two per cent inflation target. AFP/CNA reports:

The Bank of Japan (BoJ) on Tuesday adopted a two per cent inflation target and set out plans for indefinite monetary easing in a policy shift that Japan's new premier hailed as "epoch making"...

"The Bank will introduce a method of purchasing... financial assets every month without setting any termination date," it said on Tuesday...

The BoJ's asset purchases usually come with a fixed expiry date, but the new scheme will see about 13 trillion yen in monthly purchases "for some time" starting from next year, it said.

The BoJ left its benchmark interest rate at between zero to 0.1 percent.

The BoJ also today raised its economic growth forecast for the fiscal year to March 2014 to 2.3 percent from 1.6 percent previously.

Possible end of US economic weakness and Fed accommodation

Matthew Boesler at Business Insider reports the views of several analysts who think that the period of weak US economic growth may be coming to an end.

In 2009, Mohamed El-Erian, CEO of PIMCO– the world's biggest bond fund manager – coined the term “new normal” to describe the period of economic malaise the U.S. would experience in the wake of the biggest recession of a generation...

On Thursday, El-Erian told CNBC that the “new normal” may soon be over...

Société Générale economist Aneta Markowska agrees, and she thinks it could happen in the first half of 2013 – even sooner than most expect.

An end to economic weakness would mean a potential tightening from the Federal Reserve. This will have implications for markets. From a note to clients by Markowska:

On the Fed, we are still leaning toward a year-end termination of asset purchases. However, as the markets try to front run the Fed, the watershed moment could come long before then. Consequently, we are revising our forecast for the 10-year Treasury yield and now look for a 2.2% target at the end of Q1, and a year-end target of 2.75%.

Indeed, Bloomberg reported at the end of last week that some Fed officials have become concerned about overheated markets.

Federal Reserve officials are voicing increased concern that record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases...

“Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels,” [Kansas City Fed President Esther] George said in a speech last week. “We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances.”

Bernanke himself raised that concern this week, saying the central bank has to “pay very close attention to the costs and the risks” of its policies during a Jan. 14 discussion at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor...

The first sign of Fed tightening may set off a hair trigger in the bond market, said Drew Matus, senior U.S. economist at UBS Securities LLC in Stamford, Connecticut.

“There is no pulling back a little,” he said. When the Fed begins to shrink its portfolio, investors will start to price in the entire stock of bonds coming back into the market. “It is always going to be hard to disengage in a very gradual manner.”

There are some who think that the Fed will remain accommodative though.

“They are still mostly in the mode of looking to support the economy,” said Phillip Swagel, a former assistant secretary for economic policy at the U.S. Treasury who is now a professor at the University of Maryland’s School of Public Policy in College Park.

“For them to take action to head off financial sector froth when the economy is still weak is very difficult,” Swagel said.

Bill McBride also does not see the Fed tightening soon. Despite being “pretty optimistic” about the economy and forecasting no recession in 2013, he thinks that the economy will be “sluggish with all the austerity”. With inflation also not an immediate concern, he thinks that “the Fed will probably stay accommodative for a few more years”.

China's economy accelerates in fourth quarter

Friday brought signs that China's economy stabilised in the fourth quarter of 2012, growing 7.9 percent from a year earlier, up from 7.4 percent in the third quarter and ending seven straight quarters of slowing growth.

For December, industrial production grew 10.3 percent from the previous year, the fastest pace since March, while retail sales grew 15.2 percent, accelerating from 14.9 percent in November.

Fixed-asset investment for the whole of 2012 rose 20.6 percent, slightly down from the 20.7 percent gain in the first 11 months of the year.

Another report from China on Friday showed that new home prices rose in December in 54 of 70 cities the government tracks, the most in 20 months.

Elsewhere, though, the economic data were not as positive.

In the UK, retail sales fell 0.1 percent in December. Retail sales between October and December fell 0.6 percent compared to the previous three months, the biggest fall since August 2011.

In the US, the preliminary January reading of the Thomson Reuters/University of Michigan index of consumer sentiment showed a drop to 71.3, the lowest since December 2011, from 72.9 the prior month.

S&P 500 hits 5-year high as housing starts jump

US stocks rose on Thursday. The S&P 500 rose 0.6 percent to a five-year high of 1,480.94.

Helping to boost investor sentiment in the US on Thursday was the report of a 12.1 percent rise in housing starts in December. Building permits also rose, albeit by a more subdued 0.3 percent.

In addition, initial claims for unemployment benefits decreased by 37,000 to 335,000 last week, the fewest since January 2008.

On the negative side, the Federal Reserve Bank of Philadelphia’s general economic index dropped to minus 5.8 from 4.6 in December.

US economy expands, Japanese stocks plunge

US economic reports on Wednesday were mostly positive. Industrial production rose 0.3 percent in December, with manufacturing in particular jumping 0.8 percent. The Federal Reserve's Beige Book reported that economic activity expanded last month in all 12 districts at either modest or moderate pace. The National Association of Home Builders/Wells Fargo housing market index was unchanged at 47 in January. Consumer prices were unchanged in December.

However, in the euro area, consumer prices rose 0.4 percent in December, leaving the inflation rate unchanged at 2.2 percent.

China saw foreign direct investment fall 4.5 percent in December from a year earlier, leaving total inflows for 2012 down by 3.7 percent compared to the previous year, the first full-year decline since 2009.

There were mixed data from Japan. Core machinery orders jumped 3.9 percent in November, the second consecutive increase. However, the consumer confidence index for general households fell to 39.2 in December from 39.4 in November.

Japanese stocks plunged on Wednesday. The Nikkei 225 fell 2.6 percent after the yen rose for a second day.

World Bank cuts global growth forecast

The World Bank has lowered it growth forecast for the world economy. Bloomberg reports:

The World Bank cut its global growth forecast for this year as austerity measures, high unemployment and low business confidence weigh on economies in developed nations.

The Washington-based bank projects the world economy will expand 2.4 percent, down from a June forecast of 3 percent, after growing 2.3 percent in 2012. It halved its forecast for Japan, cut the U.S. projection by 0.5 percentage point and predicted a second year of contraction in the euro region. It also lowered projections for emerging markets led by Brazil, India and Mexico.

US economic data on Tuesday were mixed. Retail sales rose 0.5 percent in December, the biggest gain in three months. The producer price index fell 0.2 percent in December, the third consecutive decline. The Federal Reserve Bank of New York’s general economic index fell to minus 7.8 in January from minus 7.3 in December. Home prices grew by 7.4 percent in November from the previous year, according to CoreLogic, the fastest increase since May 2006.

Meanwhile, in the UK, house prices held steady in December as the RICS house price balance rose to 0 from -9 in November, avoiding a negative reading for the first time since June 2010. The inflation rate also held at 2.7 percent for the third month running in December.

In Germany, inflation accelerated to 2.0 percent in December from 1.9 percent in November even as the economy contracted an estimated 0.5 percent in the fourth quarter.

Chinese stocks surge, eurozone industrial production falls

Chinese stocks rallied strongly on Monday on the possibility of greater foreign participation in the stock market. AFP/CNA reports:

Shanghai surged 3.06 per cent, or 68.74 points, to 2,311.74 after the head of China's securities regulator, Guo Shuqing, said the investment quota for foreigners in the domestic equity market could be increased 10-fold...

At a Hong Kong conference on Monday, Guo said at present investment by foreign institutions -- individuals are barred -- accounts for "just 1.5 or 1.6 per cent" of China's A-share market, stock denominated in the domestic yuan currency.

He said the quota could be increased 10-fold in an effort to boost the stock market, without elaborating.

Among the few economic reports on Monday was one showing that industrial production in the euro area fell 0.3 percent in November, its third consecutive decline.

Encouragingly, though, production of machinery used to make other goods, an indicator of future business, rose 0.7 percent in November after two months of declines.

As global economy continues to grow, investors move into equities

Economic data last week mostly showed growth in the global economy.

There were few economic reports from the United States last week. The trade report did show a 1.0 percent rise in exports in November and a 3.8 percent jump in imports, suggesting a growing economy.

In the euro area, a report from the European Commission showed that its economic sentiment indicator rose to 87.0 in December from 85.7 in November. This was its second consecutive month of improvement.

In China, exports jumped 14.1 percent in December from the previous year, well up from 2.9 percent in November, while imports grew 6.0 percent in December after having been flat the previous month. However, new local currency loans by banks fell to 454.3 billion yuan in December from 522.9 billion yuan in November.

Economic data from Japan were also mixed. The economy watchers survey showed that the diffusion index for current conditions jumped to 45.8 from 40.0 in November while the future conditions index surged to 51.0 from 41.9. However, the index of leading economic indicators fell 0.9 point in November while the index of coincident economic indicators fell 0.6 point in November, its eighth consecutive decline.

On the whole, though, global economic conditions look relatively benign, at least on the surface. Which is possibly why investors are getting back into equities. In the immediate aftermath of the US Congress producing an agreement to avert the so-called fiscal cliff, the MSCI All-Country World Index jumped 3.1 percent in the first week of 2013.

Data from EPFR Global showed that about $22 billion flowed into equity funds around the world in the first week of the year, the second-highest on record. Flows into emerging-market equity funds were at $7.4 billion, the highest on record.

China recovery unsustainable, stocks to rise

Recent signs of improvement in China's economy was marred on Friday by a report showing that China's inflation accelerated in December for the second straight month to 2.5 percent, the highest since May.

For 2012 as a whole, though, China's inflation rate slowed sharply to 2.6 percent from 5.4 percent the year before.

Despite the lower inflation, analysts see little scope for further monetary stimulus.

“The central bank is concerned about underlining inflationary pressures and it is one reason they have not cut more aggressively,” Ben Simpfendorfer, managing director of Silk Road Associates, told AFP. “So the biggest risk is this is actually a restraint on policy makers' ability to support the economy, either through rate cuts or through more stimulus.”

“The central government may come under pressure to tighten controls on the property market once the sector shows signs of heating up, which will definitely affect the pace of the overall economic recovery,” said Yao Wei, an economist with Societe Generale.

Indeed, James Gruber at Asia Confidential thinks that China's economy has become “more lopsided” than ever and that the recent recovery is unsustainable. “While government measures to stabilise the economy have worked in the short-term, they may be sowing the seeds for a more serious downturn later on,” he said.

Despite his pessimism on China's recovery, Gruber thinks there is reason to be optimistic about China’s stock markets.

The Chinese market probably has 10-15% further upside from here. The reasons are . . . reasonable valuations coupled with obvious potential catalysts from structural reform via new leadership. To those reasons, I would add another: a wall of freshly-printed central bank money looking for a home, making likely targets of laggard markets such as China.

Meanwhile, one stock market that has been doing well recently is Japan's. The Nikkei 225 rose 1.4 percent on Friday, capping its longest weekly winning streak since December 1988, after the government unveiled a 20.2 trillion yen stimulus plan.

Economic data from Japan on Friday had been mixed.

A fall in exports pushed the current account balance into a 222.4 billion yen deficit in November, the first time since at least 1985 that it has been in deficit in months other than January.

Encouragingly, however, the economy watchers survey revealed improved service sector sentiment in December. The index for current conditions jumped to 45.8 from 40.0 in November while the future conditions index surged to 51.0 from 41.9.

The US trade deficit also widened in November. However, with exports rising 1.0 percent and imports jumping 3.8 percent, this probably signals a pickup in growth.

Indeed, in the UK, industrial production rose 0.3 percent in November after having fallen 0.9 percent in October.

Still, that did not stop the National Institute of Economic and Social Research from seeing a 0.3 percent contraction in the UK economy in the fourth quarter.

ECB and BoE leave monetary policies unchanged, Asian data mixed

Both the European Central Bank and the Bank of England left their monetary policies unchanged after their monetary policy meetings on Thursday.

Meanwhile, there were mixed economic data from Asia on Thursday.

In China, exports jumped 14.1 percent in December from the previous year, well up from 2.9 percent in November. Imports grew 6.0 percent in December after having been flat the previous month.

Credit and money supply data from China were less positive though. M2 grew 13.8 percent in December, a bit less than the 14.0 percent expected, while new local currency loans by banks came in at 454.3 billion yuan in December, less than the 550 billion yuan expected.

More worrying were data from Japan on Thursday. The index of coincident economic indicators fell 0.6 point in November, down for the eighth straight month. The index of leading economic indicators fell 0.9 point.

German industrial production shows weak rebound, UK recruitment and exports grow

Wednesday brought better economic data from Germany compared to the previous day, albeit barely. German industrial production rose 0.2 percent in November, rebounding only slightly after having fallen 2.0 percent in October.

Outside the euro area, though, there were encouraging signs for the UK economy.

The Recruitment and Employment Confederation reported on Wednesday that the number of people finding jobs grew again in December while vacancies rose at the fastest pace in almost two years.

In addition, the UK goods trade deficit shrank to 9.164 billion pounds in November from 9.487 billion pounds in October as exports rose faster than imports. The deficit remained higher than the past year's average though.

Eurozone economic sentiment improves but unemployment hits record high

There was some good news for the euro area on Tuesday. The European Commission's economic sentiment indicator rose by 1.3 points to 87.0 in December, the second straight month of gains.

November data, however, had been weak. The unemployment rate in the euro area rose to a record high of 11.8 percent in November from 11.7 percent in October while retail sales rose just 0.1 percent in November.

Germany, the euro area's largest economy, also reported weak data for November on Tuesday. Factory orders fell 1.8 percent while exports plunged 3.4 percent, the steepest decline in more than a year.

Quantitative easing and bond yields

Last week, I wrote that global stocks rose in 2012 because of quantitative easing by central banks.

Government bonds are the direct beneficiaries of quantitative easing, but the depressed bond yields that result have forced investors to reach for return in higher-risk equities, thus pushing up prices of the latter.

The effect of quantitative easing on bond yields have actually been somewhat controversial, with some arguing that QE causes yields to rise because of raised expectations on future economic growth and inflation. For example, Matt O'Brien at The Atlantic has a chart that shows that yields “rise almost every time the Fed buys bonds, and fall almost every time it stops”.

However, in his latest blog post, Mark Dow points out that this effect of QE -- officially termed LSAP -- is only short-term.

Now, let’s go back and look at the chart again. You will see what technicians call “lower highs and lower lows”. And it’s important to note that this pattern was taking place against the backdrop of an improving economy which would normally push UST yields higher.

This to me means two important things: one, LSAPs have almost certainly over time lowered the clearing rate for UST yields—even though the impulse correlation, driven by economic expectations, has worked in the short-term in the opposite direction.

The second observation is that the “expectations effect” was of lesser amplitude with each Fed announcement, again, against the backdrop of an improving economy... This is because sentiment surrounding monetary policy has done a 180 over the past two/three years. Because the shifts in expectations were not subsequently validated by fundamentals, market participants progressively came to view effects from Fed policy as psychological and ephemeral... Most everyone by now has wrapped their head around the notion of “liquidity trap”.

Dow concludes that “the end of LSAPs will matter for yield levels”. However, he also thinks that while monetary policy has been relatively impotent so far, things may be starting to change.

Monetary policy can be very, very powerful when the soil is fertile. This is not the time to become complacent about the impotence of monetary policy. That time has passed. It may not be tomorrow, but the efficacy of monetary policy has now become, as the economists might say, a positive function of time.

Global economy maintained expansion at end of 2012

The new year has started with some positive signs for the global economy.

Surveys of purchasing managers around the world showed that the global economy continued to expand in December. The JPMorgan global all-industry output index rose to 53.7 last month from 53.6 in November.

JPMorgan Global All-Industry Indices
	November	December
Output	53.6	53.7
New orders	52.2	52.9
Input prices	55.0	55.1
Employment	50.0	52.3

Improvement in the purchasing managers' data from the United States again helped drive the improvement in the global reading. Markit's US manufacturing PMI rose to 54.0 in December from 52.8 in November. The Institute for Supply Management's manufacturing PMI was less positive but still showed a return to expansion in December at 50.7, rising from 49.5 in November. The ISM's non-manufacturing index rose to 56.1 from 54.7.

Adding to evidence of continuing growth in the US, the employment report for December showed that nonfarm payrolls increased by 155,000 last month after increasing by 161,000 in November.

In the euro area, the contraction in the economy slowed in December. Markit's composite output index rose to 47.2 in December from 46.5 in November. The manufacturing PMI fell to 46.1 from 46.2 in November but the services business activity index rose to 47.8 from 46.7.

Meanwhile, economic expansion continued in China in December. The HSBC composite output index rose to 51.8 from 51.6 in November. The manufacturing PMI from the China Federation of Logistics and Purchasing and the National Bureau of Statistics was unchanged at 50.6 in December while HSBC's China manufacturing PMI rose to 51.5 from 50.5 in November. For the services sector, the official PMI rose to 56.1 in December from 55.6 in November but HSBC's services PMI fell to 51.7 from 52.1.

Moving in the opposite direction though was Japan, where Markit's composite output index fell to 49.3 in December from 49.9 in November. The manufacturing PMI fell to 45.0 in December, a 44-month low, from 46.5 in November. The services business activity index rose to 51.5 in December from 51.4 in November.

Still, the improvement in global economic data was enough to move David Hensley, Director of Global Economics Coordination at JPMorgan, to note in the global purchasing managers survey report: “The global economy is therefore entering the new year on a positive footing and, with trends in demand and other forward-looking indicators still supportive, should maintain this momentum in the coming months.”

S&P 500 hits 5-year high as US employment rises

The Standard & Poor’s 500 Index hit 1,466.47, its highest level since December 2007, after gaining 0.5 percent on Friday.

Economic data on Friday were mixed.

US nonfarm payrolls increased by 155,000 in December and the unemployment rate held at 7.8 percent.

The Institute for Supply Management's non-manufacturing index rose to 56.1 in December from 54.7 in November.

US factory orders were flat in November even as orders for non-defense capital equipment excluding aircraft rose 2.6 percent.

In the euro area, Markit's composite index based on a survey of purchasing managers rose to 47.2 in December from 46.5 in November after the services index rose to 47.8 from 46.7.

German retail sales rose 1.2 percent in November.

The eurozone inflation rate remained at 2.2 percent in December.

In the UK, the Markit/CIPS services PMI fell to 48.9 in December, its lowest reading since April 2009, from 50.2 in November.

UK consumer credit rose by 0.1 billion pounds in November, mortgage approvals rose to 54,036 in November, the highest in 10 months, from 53,071 in October but mortgage lending dropped by 0.2 billion pounds.

In China, HSBC's services PMI fell to 51.7 in December from 52.1 in November.

US private sector jobs grow, Chinese services accelerate

The US employment situation appears to have improved in December. The ADP National Employment Report on Thursday showed that the private sector added 215,000 jobs last month after increasing payrolls by 148,000 in November.

Another report on Thursday showed that initial claims for state unemployment benefits increased 10,000 to 372,000 last week but the four-week moving average was little changed at 360,000.

In Germany the number of unemployed rose by 3,000 in December but the unemployment rate held steady at 6.9 percent.

Even Spain had positive data to report on Thursday, with the number of people unemployed falling by 1.2 percent in December.

Meanwhile, China again added to signs that its economy is picking up pace. The National Bureau of Statistics and China Federation of Logistics & Purchasing reported on Thursday that their non-manufacturing PMI rose to 56.1 in December from 55.6 in November.

However, data from the UK on Thursday showed renewed weakness there. The Markit/CIPS construction PMI fell to 48.7 in December from 49.3 in November while Nationwide reported that house prices fell 0.1 percent in December after being unchanged in November.

Markets rise as fiscal cliff averted, manufacturing returns to growth in UK and US

Markets rallied strongly on the first trading day of 2013 after the US Congress averted the so-called fiscal cliff with a last-minute deal. The S&P 500 jumped 2.5 percent while the Stoxx Europe 600 climbed 2.0 percent.

Markets rose despite weak data from Europe. Markit's eurozone manufacturing PMI fell to 46.1 in December from 46.2 in November.

However, economic data elsewhere had been more supportive for markets.

The Markit/CIPS UK manufacturing PMI jumped to a 15-month high of 51.4 in December from 49.2 in November.

In the US, manufacturing also returned to growth in December, with the Institute for Supply Management's manufacturing PMI rising to 50.7 from 49.5 in November. Markit's manufacturing PMI painted an even better picture, rising to 54.0 in December from 52.8 in November.

Marring the picture somewhat was a 0.3 percent fall in construction spending in the US in November, the first decline in eight months.

Chinese manufacturing shows expansion

The new year brought confirmation that China's manufacturing sector is recovering. The National Bureau of Statistics and China Federation of Logistics and Purchasing reported on Tuesday that their manufacturing PMI held at 50.6 in December, unchanged from November, indicating expansion in the manufacturing activity.

Indication of an upturn was also evident elsewhere in Asia. A report today showed that Singapore's economy grew at an annualised rate of 1.8 percent in the fourth quarter after contracting at a 6.3 percent rate in the previous quarter.

Markets end year with solid gains

Bloomberg reports on the markets on the last day of the year:

The Standard & Poor’s 500 Index jumped 1.7 percent to 1,426.19 at 4 p.m. in New York for its biggest gain since Nov. 19. The Stoxx Europe 600 Index closed 0.3 percent higher. Ten- year Treasury yields were up six basis points at 1.76 percent, still the lowest-ever year-end close. The Japanese yen weakened, capping the biggest annual drop versus the dollar in seven years. Gold extended a 12th annual gain, the longest streak since at least 1920.

The S&P 500 completed a 13 percent gain for 2012, its best year since 2009... Benchmark indexes climbed to their highs of the session after Senate Republican Leader Mitch McConnell said lawmakers reached an agreement on all tax issues and were “very, very close” to a deal to avert the so called fiscal cliff...

Europe’s benchmark Stoxx 600 capped a 14 percent gain for the year, also the biggest annual rally since 2009...

In Asia, the Shanghai Composite Index rose 1.6 percent to a six-month high on Monday. Supporting stocks there was the final reading of HSBC's China manufacturing PMI, which came in at 51.5, better than the 50.9 preliminary reading and the 50.5 reading in November.

Japan’s Nikkei 225 Stock Average rose 0.7 percent, bringing its annual advance to 23 percent, the biggest since 2005.