Economic comments, week ending Dec. 17

By John W. Davidson | Dec 19, 2010

This week's releases portrayed steady global economic recovery void of evidence of inflationary pressures. At the conclusion of the FOMC meeting this week, the U.S. Fed provided assurance that the Central Bank was going to stay the course with QE2. Based on the extension of the U.S. tax rates, the continuation of QE2, and evidence of U.S. recovery, several economists have revised their 2011 U.S. GDP forecasts higher -- north of 3 percent. In spite of the improved economic conditions, bond and stock markets were both mixed on the week; the U.S. dollar gained on the Pound, Euro, and Looney, but slipped against the Yen. Corporate bond spreads were little changed. Oil prices inched higher to close just over $88/barrel; Gold dropped $10 on the week to close at $1375/oz. Bankrate.com's 30-year mortgage rates rose 12 bp to 5.02 percent.

 

 

Perspective

One message of the midterm election was that voters on both sides of the aisle wanted the Congress and the President to work together to find solutions that are in the best interest of the country. This week's compromise resulted the extension of the Bush era tax cuts for two more years plus a 2 percent holiday from Social Security taxes for 2011. In response, the U.S. stock market appreciated and economists upped their 2011 U.S. GDP growth estimates.

The sale of our home in Connecticut was also a result of a compromise. We negotiated an agreement price, timing of the settlement date, and work that was to be accomplished as a result of the engineering report. The result was that the buyer upgraded his living situation at a time when home prices were near their three-year lows and home mortgages were were at all-time lows. The sellers got a fair price considering the state of the housing market and no longer need to maintain their home in Connecticut. Secured by contract, the deal is complete with no further negotiations or compromise required.

The difference between the house sale and the budget compromises is that hard work is yet to be done to tackle the budget problems. It is easy to get politicians to compromise on how much money to allocate to their constituents. It is much more difficult to build a consensus on how to decrease spending and increase taxes to close the budget gap. That will be the real "compromise" test of this President and the new Congress.

Politicians have a history of providing stimulus; in the past, the independent Central Bank made the hard decisions to tighten monetary policy sometimes offsetting fiscal budgets which were out of control. U.S. Fed President Bernanke has been sounding like a politician campaigning for his QE2. The release at the end of this week's FOMC meeting confirmed the Fed's commitment to providing liquidity as needed. When the time comes to correct expanding budget deficits and stave off the inflationary pressures, who will be the "parent" to take the tough actions to tighten monetary and fiscal policies?

 

Economic Releases

The chart below shows that Housing Starts (red) and Permits (blue) have been little changed for two years. Starts were 550,000 and Permits were 530,000 for November. These numbers are about a quarter of the numbers that were being generated in the peak of the housing boom up until 2005.


 

Meanwhile inflation has been well contained. The Year-over-Year (YOY) CPI data through November are shown in the chart below. US YOY CPI (red) was just 1.1 percent. The French CPI (gray) was 1.6 percent while the Eurozone (green) was 1.9 percent. The UK's CPI inched higher to 3.3 percent in November.

 


Not shown in the chart above, U.S. CPI rose only +0.1 percent in November, both with and without food and energy. US Producer Prices (PPI) rose +0.8 percent; ex-food and energy PPI rose only +0.3 percent. France's CPI also rose only +0.1 percent in November. UK's CPI rose +0.4 percent; UK's Input PPI rose +0.9 percent.

 

 

Other Economic Releases

In the US, Retail Sales rose +0.8 percent in November; without the more volatile automobile sector, they rose 1.2 percent. Initial Jobless Claims continued to improve with 420,000 new claims the week of December 11th. Both the Philadelphia Fed Index rose a couple of points in December; the Leading Indicators rose 1.1 percent in November. Industrial Production rose +0.4 percent in November; Capacity Utilization rose to 75.2.

Canada's Capacity Utilization Rate increased to 78.1 percent in the third quarter and the 2nd quarter rate was revised almost a point higher to 76.9 percent. Leading Indicators in Canada rose +0.3 percent in November.

Germany's Zew Indices of Current Situation and Economic Sentiment both rose in December. Germany's IFO indices of Business Climate, Current Assessment, and Expectations also rose in December.

UK's retail sales increased +0.3 percent in November both with and without automobiles and fuel; October's data was also revised higher.

Brazil's unemployment dropped 4 ticks to 5.7 percent in November.

 

Equities Markets

Most equity markets posted positive returns for the third week in a row. The quarter and year are shaping up to post positive returns for most markets as well.

 


Bond Markets

Bond markets were mixed this week, but the yield curve steepened as investors demanded additional spread to hold longer maturity bonds. Fears of future inflation and demand for government funding put upward pressure on long bond yields.

 


 

Currencies

The U.S. dollar rebounded against the Pound, Euro, and Looney on the week.

 


Economic Sectors

The Health Care sector responded positively to this week's court ruling against the Obama Health Care plan requiring everyone to have health insurance. Small Cap Value was the best capitalization sector. Interest sensitive Financials and REITS posted the weakest returns on the week. Large Cap Value was the worst capitalization sector.

 


 

Data Source: Bloomberg LP

 

 

 

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