Economic comments, week ending Jan. 20

By John W. Davidson | Jan 23, 2012

This week's releases were positive for U.S. growth and well-contained inflationary pressure. Equity prices were higher and government bond prices were lower. Credit spreads narrowed, which generated higher relative year-to-date returns for spread-product (high yield plus corporate). The dollar slipped, energy prices fell and metals prices rose. Prices on natural gas plunged to the lowest level in a decade.



This past week we attended a terrific lecture by Tom DeMarco and Mac Deford, "1,000 Years in 100 Minutes," which provided some interesting comparisons in the rise and fall of the Roman Empire and its parallels with the U.S. The lecture was part of the build-up and background for this year's Camden Conference, "The U.S. in a 21st Century World: Do We Have What it Takes?"

One of the conference speakers, Clyde Prestowitz, quotes British Historian Windwood Reade in his book, "The Betrayal of American Prosperity": "Rome lived upon its principal till ruin stared it in the face. Industry is the only true source of wealth, and there was no industry in Rome. By day the Osia Road was crowded with carts and muleteers, carrying to the great city the silks and spices of the East, the marble of Asia Minor, the timber of the Atlas, the grain of Africa and Egypt, and the carts brought nothing out but loads of dung. That was their return cargo."

What is our return cargo? Do we have the right policies? What can we do to delay the fate of the Roman Empire? Do we have what it takes? See the Camden Conference, Feb. 17-19, to learn what the speakers have to say. Post-conference highlights and video will be available.


Economic Releases

In the U.S. December headline Consumer Price Index (CPI) was flat. Even without the more volatile food and energy components, core CPI rose only a tick. December Producer Price Index (PPI) fell -0.1 percent; core PPI (ex-food and energy) rose +0.3 percent. The chart below shows that the YOY December CPI numbers were 3 percent and 2.2 percent for Core (red) and ex-food-and-energy (blue) respectively. December YOY PPI (green) rose 3.0 percent, as well.

The chart also gives a longer term perspective. The headline CPI number was more volatile, as you would expect, but has trended down in the final quarter of 2011. On the other hand, Core CPI and PPI have crept higher in 2011. While most reports in the U.S. and elsewhere have shown that inflationary pressures have been well contained, continuing upward trending core measures in the U.S. could raise inflationary pressure and restrict Fed easing.

Source: Federal Reserve Bank of St. Louis FRED database


In the UK, December CPI rose +0.4 percent, but the YOY rate dropped 6 ticks to 4.2 percent. In the EU, December CPI rose +0.3 percent, lowering the YOY rate to 2.7 percent. German PPI fell -0.4 percent in December, which dropped the YOY rate to 4.0 percent.

Canada's CPI dropped -0.6 percent in December, which lowered its YOY rate to 2.3 percent.


Other economic releases

In the U.S., December industrial production rose +0.4 percent and capacity utilization rose a point to 78.1 percent. December housing starts and permits were slightly lower at 657,000 and 679,000 respectively. Existing home sales, on the other hand, rose 5 percent to 4.61 million in December, spurred on by record low mortgage rates and home prices. The Philadelphia Fed Survey of general business conditions fell 3 points to 7.3 in January. On the positive side, initial jobless claims fell 50,000 to 352,000 the week of Jan. 14, which took the four week average down to 379,000.

The Bank of Canada met last week and left interest rates unchanged at 1 percent. Canadian Manufacturing Sales increased +2 percent in November.


In the U.K., retail sales increased +0.6 percent in December, which led to a 2.6 percent YOY increase. U.K. Unemployment ticked up to 8.4 percent in December. Germany's ZEW Surveys of current conditions and business expectations both showed improvement in January.

China's GDP grew 2 percent in the fourth quarter of 2011, which led to an annual increase of 8.9 percent. China's industrial production and retail sales increased 1.1 percent and 1.41 percent, respectively, in December.


Equities Markets

Most equity markets were higher again this week, providing a positive start to the new year across the globe.



Bond markets

Government bond markets were lower (and yields higher) on the week. A new 10-year TIP was issued this week with a 1/8th coupon and a premium price for a negative yield credit spreads were lower and returns were higher on the week, reversing last year's trend where spread product underperformed comparable Treasuries. To view Corporate, Emerging Market, & High Yield YTD returns visit ML Bond Index YTD 2012 Total Returns.



Currencies and commodities

The dollar fell against the Pound, Euro, and Looney this week, canceling most of the this year's previous gain. Natural gas prices dropped to a decade record low. Led by collapsing natural gas prices, energy prices fell, but metal prices rose on the week.





Data Source: Bloomberg App for iPhone

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