Euro Zone Holiday Present Followed by U.S. Consumer Confidence

A few weeks ago, European stocks were down by an average 25%, but they closed strong, trimming the decline to about 11% for 2011. Europe�s surprising turnaround seemed like a Christmas present from the European Central Bank (ECB), which began to flood euro zone banks with cheap (1%) three-year loans, thereby reducing the previously high Italian bond yields. Italy�s three-year notes declined to a 5.62% yield vs. 7.89% in November, and its two-year notes slid to 4.85% vs. 7.81% in November. Even more encouraging, there was a healthy bid-to-cover ratio of 2.24 vs. 1.59 in November.

No wonder new Italian Prime Minister Mario Monti said Italy has pulled itself �from the edge of the precipice.�

This doesn’t mean Europe�s problems are suddenly solved. Despite Spain�s interest rate burden falling — in parallel with Italy�s — Spain�s new government announced on Friday that its current budget deficit would be about 8% of its GDP. As a result, new conservative Prime Minister Mariano Rajoy had to propose additional spending cuts and tax increases. Plus, Spain�s GDP is likely to contract in Q4, so it must be careful not to kill its economy with too many spending cuts or taxes.

Meanwhile, France, the euro zone�s second-largest economy, announced its highest unemployment rate in 12 years, at 9.3%. Furthermore, the euro now trades at under $1.30 against the U.S. dollar and under 100 to the Japanese yen (a 10-year low), so the cost of Europe�s imported goods is rising. This may explain why euro zone consumer confidence recently dropped to -20.4 after the sixth straight monthly decline.

Stat of the Week: Consumer Confidence Roars to 64.5

Here in the U.S., the economic news is much more upbeat than in Europe. On Tuesday, the Conference Board announced that consumer confidence surged to 64.5 in December, up from a revised 52.2 in November. This was much higher than economists� consensus expectations of 60. Consumer confidence has jumped nearly 25 points in the last three months and now stands at the highest level in eight months.

Said Lynn Franco, a director of the Conference Board�s consumer-research center: �Consumers are more optimistic that business conditions, employment prospects and their financial situations will continue to get better.� Since about 70% of U.S. GDP growth is tied to consumer spending, the fact that consumer confidence has dramatically improved bodes well for higher fourth-quarter GDP growth rates.

The other good news is that on Thursday, the National Association of Realtors announced that pending home sales rose 7.3% in November to a 19-month high. Overall home sales rose by 5.9% in the past year.

On the more cautious side, the S&P/Case-Shiller index of home prices in 20 cites fell by another 1.2% in October and is now down 3.4% in the past year. Nationally, this index says home prices are down 32.1% from their peak back in 2006. For 2012, however, due to easier year-over-year comparisons, low interest rates and lower home prices, home sales are expected to steadily rise. This will help boost GDP growth, since housing has been a drag on the financial sector and overall economic growth, for years.