Economic Comments — Week ending April 8

By John W. Davidson | Apr 11, 2011

While most economic releases this week showed that the global economy was solidly in the expansion zone, some signs of softening appeared. In order to stave off future inflationary pressures the European Central Bank raised rates. In spite of the inflationary pressures, the Bank of England left the United Kingdom interest rates and asset purchase programs unchanged. Equity markets were little changed and government bond markets fell. Investment grade corporate bond spreads were a touch narrower. The U.S. dollar declined against the European and Canadian currencies. Commodity prices reached new highs this week. On inflation fears, Spot Gold rose $46 to close at a new high, just under $1,475 per ounce. With geopolitical unrest, oil prices hit new highs of just under $113 per barrel for WTI and just under $127 per barrel for Brent. Bankrate.com's 30-year mortgage rates rose 5 bp— to 4.91%.

Perspective:

This week's puffing, rhetoric and political posturing in Washington accomplished very little. While both sides self-righteously guarded their political correctness, they managed to scare service-members' families. Neither side has shown the political courage to embrace the recommendations of the Simpson-Bowles bi-partisan deficit reduction commission. Until they address the big ticket items, no real progress can be made on the deficit reduction.

On a personal note, a few weeks back I mentioned attending the U.S. National Collegiate Squash Championship where Trinity won its 13th straight National Division 1 title. As follow up to that discussion, I offer the link below regarding my daughter's friend.

Economic releases:

The Services component of the March Purchasing Managers' Indices were released last week and provided a view of the global economy that is softening but remained well in the expansion zone. In the chart below, U.S. Manufacturing (blue), U.S. Services (red) and European Manufacturing (green) all declined, but European Services increased 4 ticks to 57.2. With three of the four indices just above 57 and the fourth above 61, they are all well above 50, the demarcation between expansion and contraction. Not shown, China's HSBC Services declined two ticks to 51.7. UK's March PMI for Services rose over 4 points to 57.1; its Construction Index declined a tick to 56.4.

The Bank of England (orange) met last week and made no changes in either interest rates or the amount of asset purchases. In contrast, the European Central Bank raised rates (red) 25 basis points to 1.25%, after holding rates at historic lows for two years. The Bank of Canada raised rates (green) three times in 2010 to the current 1.00%. The U.S. rates (blue) have been held at its record lows for well over two years.

Other economic releases:

In the U.S., Initial Jobless Claims declined last week to 382,000; Continued Claims declined 9,000 to 3.723 million in a further sign of strengthening of US employment. Canada's Unemployment Rate declined a tick to 7.7% in March.

In the UK, Industrial Production declined -1.2% and Manufacturing Production was flat in February. March's PPI showed increase signs of inflationary pressures; Input PPI increased 3.7% and output PPI increased +0.9%; Core PPI increased +0.4%.

Germany's Factory Orders increased 2.4% in February.

Equities markets:

Equity markets were mixed last week with modest increases and decreases with the exception of the 2.5% increase in the Hang Seng. Political and Geopolitical concerns and the accompanying oil price increases were weighing on investors.

Bond markets:

Government bond markets slipped on inflation concerns as the ECB made its first rate increase.

Currencies:

The U.S. dollar fell against 3 of the 4 currencies below; only the Yen was weaker following additional earthquake activity off the Japanese coast.

Economic sectors:

Consumer Staples did the best this week; REIT's, followed by Industrials, did the worst. Large-Cap Value companies did the best while MId-Cap's posted the biggest declines.

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