Economic comments, week ending July 15

By John W. Davidson | Jul 17, 2011
The chart on the right shows an 8.1 percent YOY change in Retail Sales with very little difference in the data with or without Autos.  The monthly numbers were further evidence of the soft patch.

This week's economic releases supported the soft patch case, but silliness in Washington and the continued sovereign debt crisis in the Euro-zone captured the markets' attention. Ireland became the third Eurozone country to have its debt downgraded to below investment grade; i.e., junk. One positive byproduct of the soft patch is lower inflationary pressures. Equity markets declined. Bond markets gained on a flight to safety. Most energy and metals prices increased.

 

Perspective

The severity of the Great Recession raised the question of whether or not policy makers should do more to prevent asset bubbles from erupting into a severe downturn. Up to this point the central bankers only jaw-boned (irrational exuberance) rising asset prices, but waited to act till after the bubbles burst. The Federal Reserve Bank of San Francisco's Kevin J. Lansing wrote an excellent piece "Gauging the Impact of the Great Recession" on that topic. I recommend the article and have provided a link to it:  frbsf.org/publications/economics/letter/2011/el2011-21. FedResBankSF Paper link

 

Economic Releases

U.S. retail sales inched a tick higher in June with the help from the rebound in general merchandise and autos from declines in the previous months.  The chart on the  left shows the monthly changes in Retail Sales, with and without autos, as well as the change in Sales of General Merchandise for April, May and June.  The chart on the right shows an 8.1 percent YOY change in Retail Sales with very little difference in the data with or without Auto's.  The monthly numbers were further evidence of the soft patch.

 







Source: US Commerce Department Release



The one positive of the economic soft patch has been reduced inflationary pressure. In the June CPI YOY chart below, only in the BRIC countries of China (purple) and Brazil (orange) did CPI increase (to 6.4 percent and 6.7 percent respectively). The UK (red) CPI declined to 4.2 percent; the US (blue) CPI was virtually flat at 3.6 percent. France's YOY CPI ticked up to 2.1 percent.

 


Source: Bloomberg LP

In other inflationary news, monthly Headline US CPI decreased -0.2 percent in June; ex-food and energy, US CPI increased +0.3 percent in June.  US PPI fell -0.4 percent in June, but ex-food and energy, PPI rose +0.3 percent in June.  France's, Italy's and Germany's CPI increased only a tick; the UK's decreased a tick in June.  The Harmonized Index of Consumer Prices in the Euro-zone was flat in June.

Other Economic Releases

The U.S.'s negative trade balance expanded further to -$50.2 billion on the back of higher oil prices. U.S. Jobless Claims declined to 405,000 in the week of July 9, dropping the four week average to 423,250. In June, Industrial Production rose two ticks but Capacity Utilization remained unchanged at 76.7 percent due to downward revision of May's IP. Primarily due to the slow recovery in employment, the University of Michigan's Consumer Sentiment index for July declined to 63.8, well below the range of expectations.

 

France's Industrial Production for May increased 2.0 percent, rebounding from a revised -0.5 percent decline in April. For the Euro-zone, Industrial Production increased only +0.1 percent in May. China's Industrial Production increased 1.48 percent in June, a 15.1 percent YOY change.

 

 

Equities Markets


Despite a strong beginning of the quarterly earnings reporting season, equity markets declined due to the silliness in Washington DC and  increasing evidence of an economic soft patch.

Bond Markets

Government Bonds rallied, even in the U.S. where the rating agencies threatened to downgrade its debt.  US Mortgage rates fell along with interest rates.  Credit spreads widened in CDS markets; in the cash markets (not shown below) spreads declined, reflecting a divergence of credit assessments that may be caused by concern of counter-party risks.

 

 

 



 

Currencies & Commodities

 

The U.S. dollar fell against the Yen, Pound, and Looney, but gained against the Euro, which was plagued by sovereign debt woes. Brent oil declined on the week, but other energy and metals prices gained.

 




Economic Sectors

Financials were the weakest sector for the week, QTD, and YTD; Energy stocks were the best for the same time periods.  In the Capitalization space, Large Growth were the least negative; Mid-Caps were the most negative on the week.


 

 

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