This week’s releases were mixed, but the CPI releases showed that inflationary pressures were well contained (see the chart below). India’s Central Bank raised rates while the Fed continued to include the reassuring “extended period” language.  Financial conditions firmed again this week; Bloomberg’s Financial Conditions index reached a fourth successive new 2 1/2-year high; corporate credit spreads narrowed for the fourth week in a row; spreads on BBB debt fell below 200 basis points, down from more than 700 basis points just over a year ago.  Most equity markets were only slightly higher and government bond markets were mixed. Oil prices traded above $80 for the week.

Check the new Sector Report in the tables at the end of the comments to see the performance of stocks in each of the economic sectors as well as large-, mid-, and small-cap comparisons. I hope you find this helpful.

Perspective

For several weeks there have been few changes in the economic indicators. The real changes that took place were outside the realm of economics.

March madness has taken over in the United States; productivity is likely to go down this month as fans will be preoccupied with the NCAA basketball tournament. We are not in Kansas anymore! In fact Kansas, the team picked to win it all by President Obama as well as my two colleagues in our East Coast office, was knocked out of the tournament by 16th seed Northern Iowa. Who? 

Finally, the health reform bill moved to a vote in the House. Kansas will recover, but the United States will be affected for years to come by health reform. The bill is far from ideal, from an economic point of view, but makes progress by increasing health insurance coverage in the United States. Health reform is necessary, but our political process burdened the bill with unnecessary overhead without adequately addressing some of the real cost containment issues.

The Insurance Investment Forum X is in San Diego’s Del Coronado this year on May 20. The discounted registration fee is available until April 1. The conference is for insurers only. Those interested can see the agenda and details in the link below: http://bit.ly/9pyJcx

Economic releases

The FOMC met this week and, as expected, maintained rates unchanged and retained the reassuring “extended period” language pertaining to the intention to keep rates low. Also, as expected, they announced the end of their purchase of MBS.

India unexpectedly raised interest rates 25 basis points in an effort to stay ahead of the inflation curve; the intra-meeting move was the first increase since July 2008 and comes on the heals of a report of accelerating inflation.  India’s move, on top of moves by China and Australia, may have worried investors that other central bankers may join in the removal of stimulus and that the economy may not be ready yet to do without it.

In the United States, February Industrial Production and Capacity Utilization each improved to +0.1 percent and 72.7 percent respectively. Housing starts and permits declined to 575,000 and 612,000 respectively. Leading indicators increased +0.1 percent. Initial jobless claims were grudgingly little changed at 457,000 the week of March 13.

Germany’s Zew Survey of Economic Sentiment declined a half point to 44.5 in March; the Survey of the Current Situation improved to -51.9. Canada’s retail sales rose +0.7 percent in January; +1.8 percent less autos.

The chart below shows that global inflation remained under control in February. In fact YOY CPI in both the United States (red) and the European Union (green) turned lower in February. United Kingdom (blue) reports next week and is also expected to report lower than the 3.5 percent reported in January. Only in France (gray) did YOY CPI tick up in February.

Feb 12 Bonds

In other inflation related news, U.S. February PPI fell -0.6 percent, U.S. Core PPI rose only a tick. U.S. CPI was flat in February; core CPI rose only a tick. France’s CPI rose +0.6 percent in February. Producer prices in Germany were flat.  Canada’s CPI rose +0.4 percent in February.
Sources: Bloomberg LP

Equities markets:  Equity markets finished the week only a touch higher after a sell-off on Friday related to India’s surprise rate increase.
Feb 12 Bonds

Bond markets:
Government bond markets were mixed this week. The yield curve flattened as short rates rose while rates on longer-term bonds fell.
Feb 12 Bonds

Currencies
The U.S. dollar rallied against the yen, euro and pound this week. 
Feb 12 Bonds


Economic sectors

The following table is a new feature using the S&P 1500 Sector Indices. These indices include stocks in the S&P 500, S&P 400 Mid-cap, and S&P 600 Indices. I have added the Bloomberg REIT index as a separate sector as well as capitalization and growth/value indices for comparison purposes. The best performing sectors are highlighted in green while the weakest are highlighted in red. Large cap value equities and the telephone sector had the best performance while small cap growth and energy fared the worst on the week.

Feb 12 Bonds

Source: Bloomberg LP