Economic comments, week ending Feb. 18

By John W. Davidson | Feb 22, 2011

At points of inflection in the economy, the messages are often mixed. So it was this past week. The recovery continued, but growth has been insufficient to generate necessary improvements in U.S. housing and employment.

Earnings surprises continued, but the percentage of positive surprises slipped below 70 percent. Increases in commodity prices have created inflationary pressures in the goods sector, but those have been partially offset by dis-inflationary pressures in the services sector. China raised reserve requirements for its banks for the second time this year in a move to stave off inflationary pressures in China.

Oil prices were little changed on the week; WTI closing this week above $86/barrel; ICE Brent closed above $102 (see chart and discussion below); gold rose $32 to close over $1389/oz.'s 30-year mortgage rates dropped 9 bps to 4.93%. Corporate bond spreads were little changed on the week. Equity and Government Bond markets were higher on the week. The US Dollar slipped on the week, especially against the Euro and Pound.



In the past year, I have been reporting oil prices using West Texas Crude traded on the NYMEX. One of our readers reminded me to the divergence between WTI and Brent due to supply and demand differences at the delivery point of each contract. The chart below shows the pricing for both WTI (green) and Brent (Grey) since last year. Most of the world prices their oil product using Brent pricing; many in the US use WTI.



Source: Bloomberg LP


This past weekend ,my wife and I joined many of our friends attending the Camden Conference on "The Challenges of Asia." As usual, the conference was first-rate. In the coming weeks, they will add the audio recording of the program presentations; they are well worth hearing. A briefer version will also be available in a section called "Educator's Guide," which is tailored to those who want to get a flavor of the conference with short snips of the speakers instead of the full length presentation. I also recommend Meredith Robyn's "The Elephant and the Dragon: The Rise of India and China and What It Means for All of Us," which I read in preparation for the conference. Those in the financial markets are keenly aware of the impact of the growth of China and India on the global economic growth rate, commodity prices, the environment, and the geopolitical balance. Robyn's book suggested ways that the US should address the re-emergence of China and India.



Economic Releases

Rising commodity prices have increased and put upward inflationary pressures on the goods sector prices in the U.S., but weak employment and housing have put offsetting pressure on wages and the services sector prices. The net inflation in most regions remains under control, but the trend is pushing higher. In the chart below the year-over-year CPI for the UK (blue) and the US (red) are shown for over five years through January. The UK YOY CPI reached 4 percent while the US YOY CPI was just 1.6 percent in the first month of 2011. The January CPI's for the EU (green) and France (grey) will be released next week, but both were up in December.





Source: Bloomberg LP


The headline U.S. CPI in January was +0.4 percent, but ex-food and -energy January CPI was +0.2 percent. Producer Prices in the US rose +0.8 percent, but ex-food and energy PPI rose +0.5 percent. January CPI in the UK rose only +0.1 percent; the core YOY rate of inflation in the UK was 3.0 percent. January CPI in Canada rose +0.3%. Producer Prices in Germany rose 1.2 percent in January. China's YOY CPI was 4.9 percent.


Other Economic Releases

In the U.S., January Retail Sales rose +0.3 percent, a bit less than expected. January Housing Starts surged over 14 percent to 596,000, but Housing Permits fell more than 10 percent to 562,000, showing mixed signals on a turning point in U.S. housing. January Industrial Production fell -0.1 percent; Capacity Utilization also fell a tick to 76.1 percent from the upwardly revised December number. Initial Jobless Claims rose to 410,000 in the week of Feb. 12; Continuing Claims were little changed at 3.911 million. January Leading Indicators were up +0.1 percent, still less than expected with a downward revision of December data.

In the fourth quarter France's GDP rose +0.3 percent, about half of what was expected, bringing the YOY increase to1.5 percent. Germany's 4th quarter GDP rose 0.4 percent, giving them a 4 percent YOY. In the UK, Retail Sales rose 1.9 percent; ex-Auto's and Fuel, Retail Sales rose 1.6 percent. Brazil's Retail Sales were flat in December.

Equities Markets

Equity markets rose across the globe. Positive earnings surprises slipped to 69 percent of the S&P 500 companies that have reported.



Bond Markets

Government bond markets rallied on the week






The US dollar slipped on the week, especially against the Pound and Euro.



Economic Sectors


This week, Energy was the best performing sector again. Telephones were the worst performing sector. Small Cap Growth was the strongest capitalization sector; Large Cap Growth lagged.





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