For the week ended January 6, 2012

Week in Review: U.S. economic strength drives markets higher despite eurozone worries

• U.S. job picture sharply better
• Eurozone debt default doubts resurface
• Manufacturing grows in U.S. and China
• Kodak eyes bankruptcy
• U.S. auto sales accelerate

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The year began with a tug of war between new indications of U.S. economic strength and ongoing eurozone weakness. A substantial jump in U.S. payrolls, greater manufacturing activity, and robust auto sales stood in contrast with growing concerns over potential Hungarian and Greek debt defaults and rising yields on Italian and Spanish government bonds.

Overall, the week saw gains in U.S. and global stocks while the price of oil and gold also rose. The euro plummeted to its lowest level in more than a year as fresh reports of economic decline made a eurozone recession appear more and more likely.

U.S. and global economic news
U.S. employment picture improves
The U.S. economy added 200,000 jobs in December, according to the U.S. Department of Labor. The unemployment rate fell to 8.5% in December from 8.7% in November. The Labor Department's nonfarm payroll report, released on Friday, was better than expected, adding momentum to a set of robust economic reports as 2012 begins. A day earlier, the monthly private sector jobs report, released by Automatic Data Processing (ADP), painted an even sunnier picture –– 325,000 new private sector jobs. However, the government’s official report stated that the private sector grew by 212,000 jobs.

Weekly U.S. jobless claims drop
Initial jobless claims fell by 15,000 to 372,000 for the week ended December 24, the eighth time in nine weeks that the weekly jobless number was below the 400,000 threshold. The four-week average fell to 373,250 from 376,500.

U.S. factory orders up 1.8%
U.S. factory orders grew by 1.8% in November from the previous month, as non-defense aircraft orders more than carried their weight, soaring 73.9%. Durable goods orders climbed 3.7%; orders for all capital goods rose 7.6%. Construction spending in the United States was 1.2% higher in November. Building permits were up 5.7%.

Eurozone debt concerns increase again
The European Central Bank intervened to prop up bond markets by buying Italian and Spanish government bonds on Friday, after the yield on Italy’s 10-year government bond hit 7.12%, a 5.24 percentage point premium over comparable German bond yields. Spanish government bond yields rose throughout the week on concerns over the country’s finances. Both countries will seek to raise several billion euros in bond sales next week.

Eurozone confidence falls
Overall confidence among eurozone consumers and businesses fell to its lowest level in more than a year, with the European Commission's Economic Sentiment Indicator falling for the tenth consecutive month, to 93.3 from 93.8 in November.

Eurozone private sector contracts
Private sector activity in the eurozone decreased in December, providing further evidence of a recession-bound region. Markit Economics reported that its composite purchasing managers’ index for manufacturing and services industries rose to 48.3 in December from 47, in November.

Eurozone inflation falls
Annual eurozone inflation fell to 2.8% in December, a decline from 3.0% in November, according to the European Union’s statistics agency. This was the first decrease in the eurozone inflation rate since July.


Manufacturing picks up in U.S. and China
U.S. manufacturing activity picked up in December, according to the Institute for Supply Management’s manufacturing purchasing managers index, which climbed to 53.9 from 52.7 in November. China’s official PMI also rose, to 50.3 in December from 49.0 in November.

German jobless rate eases, factory orders drop
Despite weakness elsewhere in the eurozone, Germany’s job market remained strong in December, as the country’s seasonally adjusted unemployment rate edged downward to 6.8% from 6.9% in November. The overall eurozone jobless rate stood above 10%. However, Germany’s industrial orders fell 4.8% in November after rising 5% in October.

U.S. and global corporate news
Kodak could file for Chapter 11 protection
Kodak could file for Chapter 11 bankruptcy protection in the next few weeks if its efforts to sell a portfolio of more than 1,000 digital patents falls through. The 131-year-old former blue-chip photography firm has struggled to transform itself from a film sales company to one focused more on commercial and consumer printers.

Monsanto reaps harvest from seed business growth
Monsanto reported robust growth in quarterly earnings on strong sales of seeds in South America, which is an increasingly important growth market to the world’s largest seed supplier. Monsanto’s corn-seed business saw sales soar 46% from a year ago, while its total net sales grew 33%. Profit for the quarter ended November 30 was more than 10 times higher than the year-earlier quarter.

Samsung predicts record profits
Korea’s Samsung Electronics predicts record fourth-quarter earnings on robust smartphone sales. The world’s largest manufacturer of flat-screen televisions estimated fourth-quarter profit of between 5.0 trillion won ($4.3 billion) and 5.4 trillion won. Its profit for the fourth quarter of 2010 was 3.01 trillion won.

Barnes & Noble lowers guidance on earnings
Barnes & Noble, facing intense competition from rival Amazon.com, has cut its earnings guidance for the year. The bookseller now expects to lose $1.10 to $1.50 per share on $7.0 billion to $7.2 billion. In August, the firm had forecast a $0.10 to $0.50 per share loss on $7.4 billion in revenue. While its Nook e-book reading device has soared in popularity, sales for its Nook Simple Touch product have been disappointing. Speculation is now growing that Barnes & Noble may opt to spin off or outright sell the Nook.

France’s Total acquires Chesapeake Energy's Ohio shale minority stakeTotal bought a minority stake in a 619,000-acre Ohio shale-producing property from natural gas producer Chesapeake Energy, which is seeking to lower its long-term debt significantly. Like other international energy companies, Total is eager to get a stake in the booming U.S. shale-drilling business. It anticipates tapping into oil and a variety of lucrative natural gas liquids, including butane, ethane, and propane.

U.S. auto sales robust
U.S. auto sales finished 2011 in high gear, as domestic and imported automobiles sold in high volumes in December and for the year. Overall, U.S. consumers purchased 10% more cars and trucks in 2011 than in 2010. Chrysler Group’s annual sales were up 26%. General Motors’ annual sales rose 13%, while Ford Motor’s sales increased 11%. Among foreign automakers, Volkswagen stood out with a 26% gain, while Nissan Motor posted a 15% annual increase. BMW ended a decade of dominance in luxury vehicle sales by Toyota Motor’s Lexus, finishing just ahead of rival Daimler’s Mercedes Benz unit. Lexus is now in third place in the luxury race.

U.S. retailers show mixed results for December
U.S. retailers reported mixed December sales results. While Macy’s, Sak’s, and Nordstrom had strong results, Kohl’s, JCPenney, and Target had a disappointing month. Overall, the 22 retailers tracked by Thomson Reuters registered a 3.4% increase in sales, slightly ahead of an expected 3.3% increase.

The week ahead

• Several large eurozone members release industrial production figures next week
• The European Union reports its preliminary quarterly GDP figures for the fourth quarter on Wednesday, January 11
• The U.S. Department of Commerce releases its December retail sales report on Thursday, January 12
• The University of Michigan announces its Consumer Sentiment report on Friday, January 13
• Chevron announces its quarterly earnings on Wednesday, January 11 and JPMorgan Chase announces its earnings on Friday, January 13.

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

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