Economic comments, week ending Jan. 14

By John W. Davidson | Jan 16, 2011

This week's releases showed continued economic recovery and started to reveal evidence of a pick up of inflation. The WSJ poll of Economists expect an upward revision to fourth quarter GDP growth, and, in 2011, an 3.2 increase increase in GDP growth and job creation of 180,000 jobs per month.

The Bank of Canada left rates unchanged at 1 percent last week after three 25 basis point increases in 2010. Both the Bank of England and the European Central Bank also met last week and decided to leave the current rates and bond buying programs in place; the ECB warned that the Bank would likely make adjustments to deal with inflation by this summer.

Additionally, the Bank of Korea raised its benchmark rate and its government took steps to deal with inflationary pressures. China increased the reserve ratio on its banks to tighten its monetary policy. Successful bond auctions by the PIGS and indications that Germany is easing its opposition to an expanded fund to fight the debt crisis gave a boost to the Euro. Oil prices rose $3 to over $91/barrel; gold fell $8 to close at $1362/oz.'s 30-year mortgage rates dropped 5 basis points to 4.74 percent. Corporate bond spreads tightened again. Most equity markets and bond yields were higher.



The challenges of 2011 will be different from those of 2010. One of those differences is the possibility of rising inflation. To combat rising prices, some central bankers have already started the tighten monetary policy; others are worried that such actions could derail recovery. Some governments have started to tighten fiscal policies, raising taxes and reducing spending. As we go through the year the actions of the central bankers and governments will shape and duration of the recovery. Actions will differ by regions and so will the resulting economic growth.


Economic Releases

Year-over-year inflation has started to inch higher. UK's December rate is expected to be 3.4 percent when it is released next week, a tick higher than the November rate. The EU's rate creeped up to 2.2 percent in December; France's rate rose to 1.8 percent. The U.S. rate increased to 1.5 percent. As absolute levels these CPIs were well contained, but the direction should put their respective central bankers on alert.

Other releases showed the re-emergence of inflationary pressures. UK's Input PPI rose 3.4 percent, but Output PPI rose only +0.5 percent in December. France's CPI increased +0.5 percent in the month of December. Germany's increased 1.0 percent. Producer Prices in the US increased 1.1 percent in December; ex-food and energy PPI was up only +0.2 percent. US CPI rose +0.5 percent in December, but ex-food and energy, CPI rose only +0.1 percent.


Other Economic Releases

In the U.S., Initial Jobless Claims increased to 445,000 the week of Jan. 8, a reversal of previous weeks' improvements. Retail Sales increased +0.6 percent in December; ex-auto's Sales increased +0.5 percent. December Industrial Production increased +0.8 percent and Capacity Utilization increased to 76.0 percent. The mid-month January University of Michigan Consumer Confidence index declined two points to 72.7.

In the UK, Industrial and Manufacturing Production increased +0.4 percent and +0.6 percent respectively in November. In Germany the annual growth rate of GDP increased 3.6 percent in 2010, the fastest pace in two decades and a sharp rebound from the -4.7 percent decline in 2009.


Equities Markets

Equity markets were mostly higher in the second week of the year. In the U.S. the DJ Industrials reached a 2-1/2 year high. From a forward looking PE ratio stocks are not overvalued in spite of the run up in 2010. Note that the usual YTD column shows the calendar year 2010 for comparison; after the first quarter, this column will revert to YTD 2011.



Bond Markets

Except for the U.S. and Hong Kong, government bond markets were lower across the globe.



The U.S. dollar fell against the Pound, Euro, and Looney on the week, but was flat against the Yen.


Economic Sectors

Energy and Small Cap Value were the best performing sectors on the week. Telephones and Large Cap Growth Sectors were the weakest on the week and for the first two weeks of the year.




Data Source: Bloomberg LP


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