Unemployment Shocks, the Dollar Surges Higher

The rally in equities moved back on course last week, as market participants were somewhat calmed by the news that the UAE central bank was providing liquidity to back the loans of Dubai World, and that the state owned company had plans to restructure its debt. The news immediately sent investors back into the equity market as the start of the week, causing the Dollar to drop to lower levels.

From a fundamental point of view, the week started off with conflicting economic news after U.S. factory activity unexpectedly grew at a slower pace in November. The Institute for Supply Management reported Tuesday that its index of manufacturing activity for November moved to a reading of 53.6 from 55.7 the month before and 54.2 in September. November's reading was below the 55.0 index reading, economists had expected to see. One must note that a reading above 50 signals expansion.

In the report, the ISM found continued improvement throughout the sector. New orders, a gauge of future economic activity, came in at 60.3, indicating improvement from October's 58.5, while inventories continued to shrink, at 41.3, from 46.9 the prior month. Production, meanwhile, came in at a healthy 59.9 after October's 63.3. Hiring remained a soft area for the factory sector, with the employment index at 50.8, from 53.1 the month before.

The housing sector also showed better than expected results as the forecasting gauge of housing-market activity climbed to its highest level in more than three years in October, thanks to government tax credits that continued drawing home buyers into the market. Construction pending was unchanged in October, at a seasonally adjusted annual rate of $910.77 billion compared to the prior month.

On Wednesday the European Central Bank announced that interest rates would remain unchanged. The Euro was especially volatile but ended Wednesday’s session higher as the markets reacted positively to the ECB’s decision to drop fixed rate repos and scale back emergency measures.

On Thursday, Markit announced that the euro zone's private sector expanded at its strongest pace for two years in the month of November, with Germany and France leading the recovery. The firm's euro-zone composite output index, a gauge of private-sector activity including the manufacturing and services sectors rose to a two-year high of 53.7 in November from 53.0 in October.

The week ended on a strong note after strong employment data released by the Bureau of Labor statistics. The Department of Labor announced on Friday that Nonfarm payrolls fell by just 11,000 last month, slowing down from a downwardly revised 111,000 drop seen in October. Consensus estimates were for a drop of 125,000 jobs. The employment rate also dropped to 10% from the expected 10.4%.

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