Economic comments, week ending Dec. 16

By John W. Davidson | Dec 18, 2011

Disappointment in the European Summit follow-up and in the lack of more accommodation on the part of the U.S. FOMC sent investors to seek safe harbors despite continued strengthening in the U.S. economy. Equity markets declined, Government Bond markets rallied, and Credit spreads widened on the week. The U.S. dollar rallied but Commodity prices declined.



The approaching holiday season has important religious and family-related significance to many of us; yet, it also has a commercial side. In the spirit of the later that I write the following:

What I want for Christmas...

I want a balanced budget, but I do not want any changes in the benefits that I receive.

I want a tax cut that someone else will pay for.

I want less government regulations on my businesses, but I want to be bailed out if I fail.

I want lower medical costs, but I need to have the latest test and procedures performed on demand.

I want the best education for my kids, but I don't want to increase my local taxes.

I want clean air and water, but I don't want to be taxed or limited in my use of carbon fuels.

I want my representative in Washington that look out for my best interest, but I don't want to change the tax code that she uses to fund her re-election.

I believe in Santa Claus....


Fortunately, the other aspects of the holiday season should lead us to replace the thoughts of "I wants," with what we need to do for the best interest of our country.

Next weekend, I will be enjoying time with family in lieu of writing "Comments."


Economic Releases

U.S. inflationary pressures have remained well contained. U.S. CPI was flat in November. Even without the more volatile food and energy component, Core CPI rose only +0.2 percent. PPI rose +0.3 percent, but the Core Producer Price Index rate rose +0.1 percent in November; the YOY PPI rose 5.7 percent while the Core PPI rose 2.9 percent.

The chart below shows the year-over-year inflationary measures for the past five years; the YOY measures tend to be less volatile and dampen some of the seasonal factors. Headline YOY CPI (red) decelerated two ticks to 3.4 percent in November; the Core CPI (blue) rate ticked up to 2.2 percent. The Core rate of the Producer Price Index on Finished Goods (orange) inched up to 2.9 percent. While the absolute levels of inflation were well contained the upward trend in the metrics may give the Fed concern down the road.


Source & URL: Federal Reserve Bank of St. Louis FRED database

Elsewhere, inflationary pressures were also well contained. The UK CPI rose +0.2 percent in November, and 4.8 percent YOY. The EU Harmonized CPI rose only a tick and +3.0 percent YOY. The French CPI rose +0.3 percent in November, and +2.5 percent YOY. Italy's CPI fell -0.1 percent, but rose 3.3 percent YOY.


Other Economic Releases


The Federal Reserve's FOMC met and, as expected, kept interest rates unchanged in the range between zero and 0.25 percent with a promise of keeping rates low through mid-2013. The loan dissenter, Chicago's Evans, had argued for "additional policy accommodation."

U.S. Industrial Production (blue in the chart below) fell -0.2 percent in November while Capacity Utilization (red) eased two ticks to 77.8 percent, which was above the 67 percent trough in 2009, but still short of the 80+ percent CU prior to the Great Recession.

Weekly Initial Jobless Claims dropped again the week of Dec. 12. Claims were 366,000 and the 4-week average of Claims dropped to 387,500. The Philadelphia Fed Survey and the Empire State report indicated a pick-up in Manufacturing this month. U.S. Retail Sales rose only +0.2 percent in November but the previous months were revised higher.


Canada's Manufacturing sales fell -0.8 percent in October, but were +7.3 percent YOY.

The EU's Industrial Production fell a tick in October. The EU's PMI flash report for Services and Manufacturing each rose a half point to 48.3 and 46.9, respectively. Germany's Manufacturing PMI flash report for December inched up to 48.1; Services gained over a point to 52.7. (The PMI demarcation between expansion and contraction is 50.) The Zew Survey for Current Conditions was lower, but for Business Expectations was a little less negative for December. France's Business Climate Indicator fell a couple of points to 94. Retail Sales in the UK fell -0.4 percent in November. UK's Unemployment Rate dropped a tick to 8.3 percent.


Equities Markets

Equity markets declined across the globe on concern that the EU does not have the tools necessary to fully deal with the sovereign debt crisis and the potential European recession could dampen global growth.


Bond Markets


Government bond yields rose on concern that a recession in Europe could slow global growth. CDS spreads on Investment Grade credit expanded.




Currencies & Commodities

In a flight to "safety" and on concern about European sovereign debt, the dollar rose against other currencies this week. Commodity prices declined which put additional pressure on the Loonie.



John W. Davidson has more than 30 years of investment industry experience and holds an MBA in finance and a master's in mathematics from Boston College, as well as a bachelor's in economics from Amherst College. He lives in Camden.



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