Economic Notes
European concerns continued to dominate other issues. This is unfortunate, considering that U.S. news has been looking better as of late and is perhaps underappreciated. Japan, which has also been largely ignored, grew for the first time in four quarters.
The European Central Bank purchased €10 Billion to purchase Italian and Spanish Bonds in order to bring yields in both of those nations back below 7.0%—the often-referred-to “breaking point.” In response to criticism he could be doing more, ECB President Mario Draghi maintained that ‘price stability’ should remain the institution’s primary objective and doing otherwise might threaten its credibility (note that many central banks, including the ECB, are subject to only a single mandate, as opposed to the Federal Reserve’s dual mandate of stable prices and maximum employment). Of course, with such a broad mandate, a wide variety of actions could be justifiable.
At the same time, Angela Merkel publicly stated that she would like to see the underlying EMU treaty revisited and revamped while Spanish elections resulted in a victory by the opposition party supporting an austerity platform. These events and public comments often seem contradictory, so it is difficult to take anything at face value due to the extreme political nature of the process. A positive side of this turmoil is that the aftermath may well lead to a more fiscally and economically strong union.
Back to the U.S….
Retail sales increased at a rate of 0.5% in November—more than expected. Interestingly, strong performances in “non-store” sales (aka online) in electronics have pointed to the new iPhone release as a key reason. As much as we hope for good economic results, it is difficult to imagine this particular product-specific effect lasting indefinitely.
The Consumer Price Index number came in at -0.1%, in contrast to a +0.3% increase the month before, while the core CPI number was up just +0.1%. The difference in the two readings was a 2% decline in energy prices during the month, which offset slightly higher food prices (although the food price trend is moderating). It is interesting to note that the owner’s equivalent rent component of CPI was sharply higher, and tends to be a more persistent part of CPI. October producer prices declined more than expected at -0.3%, while the core number remained unchanged.
Industrial production rose +0.7%, which was about twice as strong as expected—helped by vehicle assemblies (highest level since mid-2008). The capacity utilization rate also rose 0.5% to 77.8%. Capacity utilization is a more obscure and difficult-to-measure estimated figure, but improvement here is also positive and, if this continues, add to additional job growth down the line.
Several housing numbers came out this week. The homebuilder survey demonstrated a pickup in sentiment, although the absolute level remains extremely low relative to historical averages. Housing starts were down -0.3% for October, which was much better than the consensus view that we would see a sharp correction following September’s strong 7% increase. Starts came in at 628,000 units, which, as we have discussed before is an extremely low number considering broader demographic growth and replacement housing needs. Building permits were also up +10.3%—while a volatile number, this was also better than expected and points to some sporadic, albeit choppy, signs of life in the sector.
The U.S. index of leading indicators climbed more than forecast for October, at +0.9%, which is the largest rise since February. The gains looked to be broad, in terms of better numbers from consumer spending, manufacturing and homebuilding, as well as fewer overall job losses.
While economic conditions are still touchy, especially with the uncertainty in Europe, we are seeing better numbers, which has lowered the double-dip-recession risk and raised hopes for the early part of 2012. Economic research we review continues to be optimistic, albeit careful due to European political sentiment, which, of course, cannot be readily ‘modeled.’ That said, there appears to be a general understanding that European leaders (and citizens) understand the seriousness of their predicament and realize that difficult choices need to be made. The alternative, of course, is a set of even worse outcomes. That may be the best leverage remaining in the system.
This week, we will have the report from the Debt Super Committee, charged with agreeing on $1.2 Trillion in deficit reductions. Failure in achieving agreement is expected, although it remains to be seen how markets respond to the results.
Market Notes
| Period ending 11/18/2011 |
1 Week (%) |
YTD (%) |
| DJIA |
-2.85 |
4.31 |
| S&P 500 |
-3.75 |
-1.55 |
| Russell 2000 |
-3.36 |
-7.17 |
| MSCI-EAFE |
-4.06 |
-13.02 |
| MSCI-EM |
-3.82 |
-18.87 |
| BarCap Aggregate |
0.01 |
6.91 |
| U.S. Treasury Rates |
3 Mo. |
2 Yr. |
5 Yr. |
10 Yr. |
30 Yr. |
| 12/31/2010 |
0.12 |
0.61 |
2.01 |
3.30 |
4.34 |
| 11/11/2011 |
0.01 |
0.24 |
0.90 |
2.04 |
3.12 |
| 11/18/2011 |
0.01 |
0.29 |
0.94 |
2.01 |
2.99 |
This proved to be another choppy but largely negative week for risk assets as markets alternated between European fears and recovery rallies based on better U.S. economic fundamentals. This has been the same story for months, so we won’t rehash it again here. Domestic stocks outperformed foreign stocks; the more defensive consumer staples and utilities sectors unsurprisingly outperformed as more cyclical energy and financials lagged by the greatest amounts.
Investment grade fixed income overall, as represented by the BarCap Agg, was flat; treasuries gained on the risk-off week, while foreign bonds lost ground in the positive week for the U.S. dollar.
In keeping with a move away from riskier assets, commodities lost ground despite WTI crude oil getting back up to $98/barrel (it started the month at $92). Oil, as with several commodities, is tied up in a battle of uncertain global demand and a stronger dollar.
Happy Thanksgiving to all of you.
Karl Schroeder, RFC, CSA, CEP
Investment Advisor Representative
Schroeder Financial Services, Inc.
480-895-0611