Economic comments, week ending Jan. 28

By John W. Davidson | Jan 30, 2011

This week's economic and earnings releases portrayed a move from recovery into expansion, but the capital markets were under the siege of protesters in the streets of Egypt demanding the resignation of President Mubarak.  Oil prices were little changed, closing the week just above $89/barrel; gold fell another $6 to close at $1337/oz.'s 30-year mortgage rates fell a tick to 4.81 percent.  Investment grade corporate bond spreads were little changed on the week, holding on to the gains that were generated in the first three weeks of the year, but high yield and emerging market spreads widened on the increased geopolitical and inflationary risks.  Most equity markets were lower on the week.  The US Dollar strengthened against the European currencies in a flight to safety.


US fourth  quarter GDP rose 3.2 percent on the back of a strong 4.4 percent increase in Personal Consumption.  The chart below shows that as of the end of 2010, the U.S. Gross Domestic Product reached $13.382 trillion, surpassing the record peak over two years ago.  Therefore, technically the US is no longer in recovery, but is now in expansion.  GDP is the normal way of measuring the business cycles and economic activity.  Why doesn't this feel like an expansion to many?  The reason is that the labor force has yet to recover the 8 million jobs it lost during the recovery; the labor market is still in recovery.  The good news is that expansions normally last about three years and expansion is an environment where employment can continue its recovery.

Economic Releases

This week's report of New Home Sales reinforced the recovery in the US housing market.  This week's report of December's New Home Sales rose to 329,000 following last week's surge in Existing Home Sales of 5.28 million. 

In other US housing-related news, the November Cash/Shiller Home Price Index declined 1.59 percent from one year ago and -0.54 percent from the previous month.  December Pending Home Sales increased 2.0 percent.  The Davidson's home in Connecticut, which closed last week, should have been included in December Pending Sale and should be counted in Existing Home Sales in January.

Source: Bloomberg LP
Other Economic Releases

In the US, Consumer Confidence shot up 7 points to 60.6 in January according to the Conference Board; the University of Michigan's Confidence Index increased 2 points to 74.2.  The Federal Open Market Committee of the Federal Reserve met and left policy unchanged as expected.  They noted little change in outlook, but recognized a slight improvement in current conditions.  December's Durable Goods Orders fell -2.5 percent, but ex-transportation they rose +0.5 percent; this months Orders were below expectations, but the previous months Orders were revised higher, more than making up for the December shortfall.  After weeks of improvement, this week's Initial Jobless Claims increased 50,000 to 454,000 and Continuing Claims rose 4,000 to 3.991 million.


In December Canadian CPI was flat, rising only 2.4 percent from a year ago.  In Germany January CPI fell -0.3 percent, rising only 2.0 percent from a year ago.  In France, December Consumer Spending rose +0.6 percent.  In the UK, the 4th quarter GDP fell -0.5 percent from the previous quarter, but was up 1.7 percent from the previous year.


The Bank of Japan met and kept their target rate unchanged at 0.10 percent.  Japan's Jobless rate fell two ticks to 4.9% in December.


Brazil's Unemployment Rate fell four ticks to 5.3 percent.  In order to restrain rising prices, the Bank of India raised the REPO Cutoff Yield 25 basis points to 6.25 percent.


Equities Markets

Most equity markets fell on the week of Egyptian demonstrations; only the Canadians, Germans, and Japanese were able to post positive returns for the week.  All but UK's FTSE posted positive returns for the first 28 days of the year.  Quarterly S&P 500 earnings have produced 72 percent positive surprises and only 20 percent negative surprises so far this reporting period.

Bond Markets:

Government bond markets rallied in a flight to safety of the North America's.  On Euro worries the French and German markets declined.


The US dollar gained against the European Currencies, reversing some of the losses generated in the first three weeks of the year.

Economic Sectors

This week of mostly negative equity returns, some sectors, such as REITs, Energy, Materials, and Info-Tech still managed to generate positive returns.  Consumer Staples posted the worst results on the week.  Small Cap Growth had the best Cap Sector returns with Small Cap Value and Mid-Cap following close behind.  Large Cap Value stocks posted the worst returns.

Data Source: Bloomberg LP

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