For the week ended January 13, 2012

Week in Review: Markets pressured by Europe downgrade rumors

• U.S. weekly jobless numbers rise
• U.S. consumers went on credit spree in November
• Eurozone, U.K. output slumps
• German economy contracts in fourth quarter
• Hostess seeks bankruptcy protection

Markets were flat overall for the week, as a mixed bag of U.S. economic reports balanced slightly positive indications from the eurozone. The most disappointing U.S. economic news was a fairly sharp rise in U.S. initial jobless claims. Countering that was a U.S. Federal Reserve Board report noting widespread improvement in economic activity in the final six weeks of 2011 along with a jump in U.S. consumer credit and consumer sentiment.

Markets came under pressure on Friday after news that credit rating agency Standard & Poor's is reportedly going to announce a multi-country credit downgrade after New York markets close at 4 p.m. EDT. According to news reports, France and Austria will be downgraded from their AAA ratings to AA+. Slovakia will also be affected according to a Reuters report, which noted that Germany and the Netherlands will retain their top-notch ratings.Yields on 2-year and 10-year U.S. Treasuries fell, as investors sought safe havens and the euro fell to a 16-month low. Eurozone economic reports were mixed. A slump in economic output was offset by a November eurozone trade surplus and falling bond yields in Italy and Spain. That drop indicated the easing of concerns in those two vulnerable economies.

U.S. and global economic news

Weekly U.S. jobless numbers rise
Initial jobless claims rose by 24,000 to 399,000 for the week ended January 7, the ninth time in 10 weeks that the weekly jobless number was below the 400,000 threshold, though just barely this time. The four-week average rose by 7,750 to 381,750.

Fed beige book notes economic upswing in late 2011
The U.S. economy finished 2011 on a relatively strong note across all regions from November 18 to December 31, according to the U.S. Federal Reserve Board's beige book. Strong holiday sales helped, according to the report, while weakness in housing held back growth in most areas. Seven of 12 regions had “modest” growth; Dallas and San Francisco were slightly better, with “moderate” growth; New York and Chicago had a “pickup” in growth; and “activity flattened or improved slightly” in the Richmond district. This economic snapshot will help shape discussions at the Fed’s policy-setting meeting January 24-25.

U.S. retail sales muted in December
The U.S. Department of Commerce reported that December U.S. retail sales were flat, as accelerating vehicle sales countered declines in electronic sales as well as purchases of gasoline and groceries. Overall, retail and food services sales rose 0.1% from November and 6.5% from December 2010.

U.S. consumer credit jumped in November
U.S. consumer borrowing rose in November at its fastest pace in a decade, according to the Fed. Consumer credit outstanding increased by $20.37 billion to $2.48 trillion. Roughly two-thirds of the increase came from nonrevolving credit while one-third came from revolving credit, including credit card debt.

Consumer sentiment rises
Consumer sentiment rose in January, according to the Thomson Reuters/University of Michigan preliminary index of consumer sentiment. Its gauge jumped to 74.0 from 69.9 in December, surpassing a median estimate of 71.5.

U.S. trade gap widens
The U.S. trade gap grew by 10.4% in November, to $47.75 billion, the first time in five months that the trade gap widened, the Commerce Department reported. The trade gap was much wider than expected and was affected by rising oil prices, causing the cost of imports to rise, and the eurozone slowdown, which led exports to fall.

Economic output slumps in eurozone, United Kingdom
Eurozone factory output fell 0.1% in November, the third straight monthly decline, according to Eurostat, the European Union’s statistics agency. Industrial production for the 17-nation bloc also fell 0.3% year to year, its first annual decline since December 2009. The United Kingdom experienced a slump in industrial output as well –– 0.6% on a monthly basis in November and 3.1% year over year.

German economy contracts in final quarter of 2011
Germany’s economy, the biggest and strongest in Europe, contracted slightly in the fourth quarter, according to the country’s statistics office. Germany’s gross domestic product shrank about 0.25% from the third quarter to the fourth, ending two years of growth. The slowdown is unusual as German unemployment has dipped to its lowest level in a decade and business sentiment rose at year-end.

Debt yields fall in Germany, Italy, Spain, and United States
Yields on government bonds fell in several nations this week. U.S. 10-year Treasury notes sold at a record low yield of 1.90%. Italian 12-month bills yielded 2.735%, much lower than the 5.952% yield of a month ago. However, Italian 10-year notes were still elevated, yielding 6.56%, a drop of a 0.42 percentage point. Spanish 10-year bond yields declined by a 0.11 percentage point to 5.18%. And Germany’s six-month bills had an average yield of -0.0122%, down from 0.0005% at the December 5 auction. Investors effectively paid Germany to hold their money.

Eurozone posts trade surplus in November
The eurozone unexpectedly posted a €6.9 billion trade surplus in November, according to Eurostat. Economists surveyed by Dow Jones Newswires had predicted a €1 billion deficit. This bodes well for the troubled economic region and marks only the second November trade surplus since records began in 1999.

Industrial output bounces back in India
India’s industrial output rose 5.9% in November from a year earlier, recovering from a 4.7% contraction in October, according to government data. The reading surpassed an expected 2.5% rise, the median estimate in a poll of economists, and it lessens the urgent need for India’s central bank to begin easing its monetary policy.

U.S. and global corporate news

Alcoa reports fourth-quarter loss
Alcoa posted a loss of $191 million in the fourth quarter, after a year-earlier profit of $258 million, as falling aluminum prices and restructuring charges hurt the world’s largest aluminum maker. The price of aluminum has dropped about 20% over the past year.

Hostess files for bankruptcy protection
Hostess Brands, maker of Twinkies and Wonder Bread, filed for Chapter 11 bankruptcy protection. This is its second court restructuring in the past three years. Hostess said it would maintain operations with the help of a $75 million financing commitment from a group of lenders. It will continue to negotiate with 12 unionnns to modify collective bargaining agreements with the goal of lowering legacy pension and medical obligations.

Chevron profits slide
Chevron, the second-largest U.S. energy firm, reported that its fourth-quarter profit was “significantly below” third-quarter results as fuel output was curbed by maintenance work that idled part of a California refinery and by the sale of a Welsh refinery to Valero Energy.

Audi takes second place among premium-car brands
Audi passed
Daimler’s Mercedes-Benz as the world’s second most popular premium-car brand last year, behind
BMW. Audi benefited from record sales in the booming Chinese and U.S. markets. For 2011, BMW sold 1.38 million cars, up 13% from 2010; Audi sold 1.3 million, a rise of 19% annually; and Mercedes-Benz sold 1.26 million, an 8% increase. Audi’s sales in China rose 37%.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com. The Wall Street Journal Digital News

This is not a loan commitment. Programs are subject to change without notice and are only available to qualified borrowers. Underwriting terms and some restrictions may apply.

The week ahead:

• The German ZEW Indicator of Economic Sentiment is published on Tuesday, January 17.
• Wells Fargo and Citigroup announce their quarterly earnings on Tuesday, January 17; Goldman Sachs reports its quarterly earnings on Wednesday, January 18.
• The U.S. Department of Labor releases the December Producer Price Index on Wednesday, January 18, and the Consumer Price Index on Thursday, January 19.
• The National Association of Home Builders releases its Housing Market Index for on Wednesday, January 18.
• Morgan Stanley, Microsoft, Intel, and IBM report their quarterly earnings on Thursday, January 19.
• The National Association of Realtors announces its Existing Home Sales report on Friday, January 20

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com. The Wall Street Journal Digital News

This is not a loan commitment. Programs are subject to change without notice and are only available to qualified borrowers. Underwriting terms and some restrictions may apply