Economic comments, week ending Jan. 7

By John W. Davidson | Jan 09, 2011

In the first week of the year, economic releases continued to support evidence of a global economic recovery in spite of a disappointing U.S. Employment Report (see below). Commodity prices declined. Oil prices fell $3 to $88/barrel; gold fell over $51 to close at $1370/oz.'s 30-year mortgage rates dropped 20 basis points to 4.79%. Corporate bond spreads tightened. Except for the natural resources rich TSE, equity markets rose in the first week of the year. The U.S. dollar rose against the European and Asian currencies.

Note: Please find a revised version (corrected currency table) of the Economic Comments for Dec. 31 in the archives.



This is the time of the year when talking heads use and misuse the term "January Effect." This term was originally part of an argument used to show that the markets were inefficient. Academic research had discovered excess returns occurred in the month of January. Some research found that the returns occurred for the first three days of the month; some research found that it was related to out-performance of small stocks since most of the out-performance occurred in small stocks. Other research found that most of the excess returns had dissipated in the later part of January. The argument was that if the markets were efficient, then this January effect would be arbitraged away; others explain that the January effect occurs because of tax selling in December and buying back the stocks at the end of the month.

Some attribute January or the first three days of the year as an indicator for the rest of the year. I have seen no academic research that supports January as an indicator. View skeptically the reference to the January effect; make sure that the reference is supported by the research. In the interest of full disclosure, I am part of an investment club in Camden that invests on a "virtual exchange" as a basis for discussing investment ideas and as a competition. Trying to take advantage of the January effect, I fully invested my virtual portfolio (not real, only used for the competition) to work as soon as I could after the market opened on Monday. As of the end of the week, with falling commodity prices and a significant exposure to emerging markets, my portfolio was dead last, behind the four guys who have yet to enter a trade! This is embarrassing! Good thing that the competition extends to the end of the year.


Economic Releases

This week, the U.S. Employment Report and the the Purchasing Managers Indices gave the first indications of economic activity in December. The Employment Report showed some minor improvement, but the Non-Farm Payrolls' (red) increase of 103,000 jobs fell below expectations, which were puffed up by a strong ADP report of an 297,000 increase in payrolls in December. Revisions of past Non-Farm Payrolls added 70,000 jobs; considering those revisions Non-Farm Payrolls were within expectations. Private Payrolls added 113,000 jobs; Manufacturing Payrolls (blue) added 10,000 jobs. The four-week average of Initial Jobless Claims (green) eased lower to 410,000; Initial Claims for the week of January 1 were 409,000; Continuing Claims fell to 4.103 million. Also not shown below, the Unemployment Rate fell 4 ticks to 9.4%, the work week was flat at 34.3 hours, but the average hourly earnings increased +0.1%.


December's Purchasing Managers' Indices remained well into the expansion zone above 50. The U.S. Manufacturing (blue) and Services (red) below recorded a 57.0 and 57.1, respectively. European Manufacturing (green) also posted 57.1; European Services (purple) dropped to 54.2, still solidly in the expansion zone. Not shown, UK Manufacturing PMI rose to 58.3 while Services PMI slipped out of the expansion zone to 49.7. Canada's Ivey PMI dropped to 50.0. Brazil's Manufacturing PMI crossed into expansion to 52.4. China's Manufacturing and Services PMI were 56.5 and 53.1, respectively.

Other Economic Releases

In the U.S., November Factory Orders rose +0.7%; Construction Spending rose +0.4%. The minutes of the FOMC Meeting showed the governors' commitment to the current quantitative easing program, QE2. Canada's Unemployment Rate remained at 7.6% in December.

Germany's Factory Orders roe 5.2% in November, 20.6% over the previous November, but Retail Sales fell -2.4%.

Brazil's Industrial Production fell -0.1% in November, but was 5.3% over the previous November.

Source: Bloomberg LP

Equities Markets

Equity markets were mostly higher in the first week of the year. With declining commodity prices, the Natural Resource heavy Canadian TSE stood out with a negative return. 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

Bond markets were mixed across the globe and across the yield curves.


The U.S. dollar rallied against the European and Japanese currencies. The Looney edged out the dollar in the first week of the year.

Economic Sectors

In the first week of the year the Info-Tech sector posted the best returns and the Consumer Staples posted the worst return.  Large Cap Value posted the best returns while Small Cap Value posted the lowest returns in the capitalization space.

Data Source: Bloomberg LP

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