Economic comments, week ending Feb. 4

By John W. Davidson | Feb 07, 2011

This past week's economic and earnings releases remained solidly in the expansion zone with the notable exception of the U.S. Employment Report. The protests in Egypt focused the markets on geopolitical risks, but the capital markets participants appeared to take it in stride. Oil prices were little changed, closing this week again just above $89/barrel; gold rose $12 to close just under $1349/oz. Bankrate.com's 30-year mortgage rates rose 15 bps to 4.96%. Investment grade corporate bond spreads narrowed 5 to 10 bps on the week, and high yield and emerging market spreads narrowed reversing some of the previous week's widening. Equity markets were higher and Government Bond markets were lower on the week. The U.S. Dollar was mixed, slightly higher against the Yen and Euro, but lower against the Pound and Looney.

 

Perspective

For the second consecutive month, in January the U.S. Employment Report disappointed. January's Report had some conflicting news and some of it could have been attributed to the snow storm sweeping across the mid-west and east coast population centers. The Unemployment Rate unexpectedly dropped four ticks to 9.0%, but the U.S. economy generated only 36,000 new jobs. How can that be?

Let's review the different approaches taken by the conflicting reports. The Labor Department conducts a survey sample of 60,000 households during the week including the 12th of each month; that results in the Unemployment Rate. In that survey, those that have stopped looking for work are no longer classified as unemployed; perversely, when the economy starts expanding and companies hire, people re-enter the work force looking for jobs and the unemployment rate can actually rise!

Economists place more credibility on the Non-Farm Payrolls. Companies report their payroll numbers to the Bureau of Labor Statistics. In the chart below, Non-Farm Payrolls (red) show a well-below-expectations increase of 36,000 in January; Private Payrolls (black), which do not include Government Workers increased 50,000, a drop of -89,000 from the previous month. Manufacturing Payrolls (blue) increased 49,000, an increase of 35,000 from December and the biggest increase since August of 1998. Snow storms depressed the construction and transportation sectors, which experienced job losses. This report does not capture self-employed and many small business hiring. Also, these numbers can be revised in subsequent releases; in fact, the December numbers were revised higher, but even if you add the upward revisions of December to January, the results would have still been short of expectations.

 

A third measure of employment is the number of unemployment claims; both the initial claims and the continuous claims are reported weekly. Initial Jobless Claims fell to 415,000 the week of Jan. 29; Continuous Claims, reported with a one week lag, dropped to 3,925,000. In the chart below, the four-week average of Claims (green) rose 19,200 to 430,500. As strong as the U.S. economy has been, it is baffling and frustrating that employment recovery has been so weak by any of these measures.

 



 

In other U.S. employment news, in January the Average Hourly Earnings rose +0.4% while the Weekly Hours fell a tick to 34.2. In a separate report, ADP reported a gain of 187,000 in their payrolls in January. On a personal anecdotal employment note, our youngest child, Nelle, who is working at an orphanage in Kenya, just got a job as a paralegal in Washington, D.C.

 

 

 

 

 

Economic Releases

 

The January survey of Purchasing Managers across the globe put the economy well into the expansion zone in both Manufacturing and Services. US Manufacturing (blue) and Services (red) both rose over 2 points to 60.8 and 59.4 respectively. European Manufacturing (green) and Services (purple) also rose to 57.3 and 55.9 respectively. The demarcation between expansion and contraction is 50. Not shown, UK's PMI for Manufacturing and Services both rose to 62.0 and 54.5 respectively; UK's PMI for Construction also rose to 53.7. Brazil's PMI for Manufacturing rose to 53.1. China's PMI for Manufacturing and Services both dropped but, at 52.9 and 56.4, remained well in the expansion zone. India's PMI for Manufacturing increased a tick to 56.8 in January.

 


 

Other Economic Releases

In the U.S., Personal Income and Spending rose +0.4% and +0.7% respectively in December. Fourth quarter Non-farm Productivity rose +2.6% and Unit Labor Costs fell -0.6%. The Core PCE deflator was flat for the month of December, up only 1.7% for 2010. US Factory Orders rose +0.2% in December and November's Orders were revised up 6 ticks to +1.3%.

Canada's Unemployment Rate rose two ticks to 7.8% even though 69,200 were added to Payrolls.

December Retail Sales in Germany fell -0.3%. In January, Unemployment dropped a tick to 7.4% with 13,000 dropping off the unemployment rolls. In France, Producer Prices rose 1.0% in December.

Brazil's Industrial Production fell -0.7% in December.

 

Equities Markets

Equity markets rose on the week, appearing to take the protests in Egypt in stride and focusing on the continued positive earnings surprises.


 

 

Bond Markets

Government bond markets fell, especially in North America and the UK.


 

 

 

Currencies

The U.S. dollar gained against the Yen and Euro, but fell significantly against the Pound and Looney.


 

 

Economic Sectors

This past week every sector generated positive returns, but Utilities brought up the rear and Materials led on the week. Small Cap Value had the weakest returns and Mid-Cap's had the best returns, but there was very little difference between the Capitalization sectors this week.



 

Data Source: Bloomberg LP

 

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