Economic comments, week ending Jan. 14

By John W. Davidson | Jan 15, 2012

After a string of positive economic releases for the U.S. economy, this past week's U.S. releases were on the softer side. European releases continued to be softer as European countries also faced the prospects of S&P downgrades of their debt. Nonetheless, the impact of these reports must have been already been incorporated in capital markets prices. Equity and bond markets were higher and corporate credit spreads were narrower on the week. Energy, particularly natural gas, prices were lower and metals prices and the U.S. dollar were higher in the second week of the new year.



Arnie Shindler, who was the chief economist at Bankers Trust's Investment Management Group, used to remind the me as a portfolio manager that we often get mixed signals from the economy at points of inflection of economic activity. Arnie's message, many years later, is a good one for this week's softer U.S. economic news.

The market's reaction the first weeks of the new year could reflect Arnie's reassurance that a week's softer news is not necessarily mean contraction in the U.S. economy. Or, the market reaction could show that bad news was already reflected in capital market pricing, and therefore the market did not go down on the heels of softer releases.


Economic Releases

U.S. retail sales increased at the low end of expectations in December, but a portion of the disappointment was attributed to upward revisions in the October and November numbers. The chart below shows the monthly percent changes in Retail and Food Service Sales with (blue) and without (red) autos. Autos are excluded because their sales are more lumpy and cause bigger monthly swings, as shown in the graph. The headline Retail Sales increased just +0.1 percent in December while the ex-autos number fell -0.2 percent.

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



Other economic releases

On the softer side, weekly Initial Claims for the first week of the year increased to 399,000; the four-week average increased 24,000 to 381,750. For the closing week of 2011, Continuing Claims rose 19,000 to 3.629 million (Continuing Claims are reported on a one-week lag to Initial Claims). The November U.S. Trade Balance, at -$47.8 billion, was on the negative end of the range of expectations.

The Beige Book used for the Nov. 30 meeting of the FOMC described U.S. economic activity as expanding at a "modest to moderate pace," which was a bit stronger than previous books had reported. The University of Michigan's mid-month index of Consumer Sentiment surged over 4 points to 74.0, the sith monthly increase in a row.

Canada's December Housing Starts of 200,200 AR offered an upside surprise, especially following the previous month's news of a -3.6 percent drop in permits.

China's CPI increased 0.3 percent in December, creating a 4.1 percent YOY rate, which showed that inflationary pressures have been easing in the fast-growing Asian economy.

Germany's CPI increased +0.7 percent in December, creating a 2.1 percent YOY rate. Germany's Industrial Production fell -0.6 percent in November, which tempered the YOY rate to 3.6 percent. France's Industrial Production, on the other hand, increased 1.1 percent in November, leading to a +0.9 percent YOY rate. France's CPI increased +0.4 percent or 2.5 percent YOY in December. Industrial Production for the EU fell -0.1 percent in December or -0.3 percent YOY. After two successive interest rate cuts, the ECB left rates unchanged at 1.00 percent in the January meeting as expected.


Equities Markets

Most equity markets were higher on the week; only the FTSE and Swiss markets were down. For the first two weeks of the new year equity returns are positive across the board.


Bond Markets

Most bond markets were higher, and yields lower, on the week. Investment grade and high yield credit spreads were lower, but Emerging Market credit spreads were higher on the week.



Currencies & Commodities

For the second week in a row, the U.S. dollar gained against the Pound, Euro, and Looney, but was flat against the Yen. Energy prices declined, but gold prices gained on the week. Natural Gas prices have declined at double digit rates this year-to-date, as well as in 2011.






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