January 11, 2010
New Year, same mixed data Equity markets officially kicked off the new decade by slowly grinding higher in anticipation of the Friday employment report. A mixed batch of economic data early in the week offered little guidance for investors.
Construction spending, which does not attract much attention, declined 0.6% in November. Similar to many other indicators in 2009, construction spending is declining at a slower pace, with the year-over-year fall currently at 13.2%, several points higher than earlier last fall.
The ISM Index showed comparable improvement, jumping to 55.9, from 53.6 in the prior month. It is no great secret that manufacturing is ramping back up, but stronger trends in manufacturing employment, new orders and exports point to stronger growth in the coming months. Inventories are the only subcomponent mired in contractionary territory, but a lesser rate of decline represents positive growth for 4th quarter GDP.
Source: Wall Street Journal
Friday brought about the highly anticipated employment and consumer credit reports. The result was far from what economists were expecting as nonfarm payrolls posted an 85k decrease (following a revised 4k gain in November) and the unemployment rate held steady at 10.0%. Frustratingly, just like previous months, the unemployment rate held steady only because more people elected to abandon the workforce for the time being. A more comprehensive indication of labor conditions, the underemployment rate (which includes individuals working part time because they cannot find full time work) rose to 17.3%.
Consumer credit posted an equally surprising drop, falling by $17.5 billion, the largest decline on record. Revolving credit accounted for the majority of that decrease, signaling that banks are restricting credit at the same time that consumers are seeking to deleverage their personal balance sheets. As fiscal stimulus slows in the second half of the year, the economy could falter without higher spending levels at the consumer level. This week’s release of the December retail sales figure will offer better insight into how consumers are faring in the post credit world.
Regardless of the mixed economic news, equity and credit markets held steady throughout the week and strategists still expect the S&P 500 index to post a respectable gain in 2010. Right now, the average year-end price target is 1,225. However, the dispersion is wide, with the equity markets remaining just as difficult to decipher as the broader economy.
Source: Bespoke Investment Group
Part of the optimism is attributable to what December’s FOMC minutes (released this past Wednesday) described as improved momentum in economic activity. While economic conditions may not feel the same as the blistering days of 2006, they are certainly better than 2008.
is decoupling alive once again? If 2009 was the year of the corporate credit crisis, then 2010 could very easily wind up as the year of the sovereign crisis.
Already in the first 5 working days, the Prime Minister of Japan stepped down causing the new PM to call for a weaker Yen, the European Union vowed not to bailout Greece, Spain’s unemployment rate reached the highest level in a decade and the president of Iceland denied a deal to repay the British and Dutch governments for their reimbursement of domestic savers in each of those countries after the collapse of a division of Landisbanki, an Icelandic bank.
China also created a stir when it elected to raise interest rate for the first time in 5 months, generating speculation that tighter liquidity would restrict asset prices in the near future.
The US continued to prod the bee hive through a combination of trade and weapons deals. First, on Wednesday, the Commerce Department tacked on duties of 43% to 289% on Chinese steel products, a $300 million industry. To add insult to injury, the Department of Defense followed that up on Thursday by awarding a $968 million contract to Lockheed Martin, which included a provision to upgrade Taiwan’s missile defense systems.
Given the tumultuous state of sovereign affairs, one would expect investors to suffer equally, but the fallout has been relatively benign so far.
Decoupling was en vogue in the middle of last decade, referring to the divergent economic performance of developing and developed economies. That was abruptly dismissed when the global financial crisis served as an equally opportunity destroyer of economic growth.
However, decoupling may return in a new form, not necessarily developed versus developing, as was previously so popular, but rather on a country specific basis. Countries such as Germany are in a more favorable position relative to other European counterparts (see England and Spain) and a similar story reverberates throughout the globe.
Inflation is an obvious unknown that could derail the markets. According to the Federal Reserve, significant slack in the economy is tempering consumer prices for the moment and the top economist at the European Central Bank, Juergen Stark, went as far as saying that inflation would only gradually pick up at the end of this year and “price stability” would not be evident until the end of 2011.
Conversely, the Fed released a white paper warning banks against the threat of rising interest rates.
Yields on government bonds are painting a similar, yet different, story. Bonds in 5-year French and German debt have hardly budged in recent months, while yields on US debt have risen quickly since the beginning of December.
Investors need to remain cognizant of differing fates in 2010. Barring a systemic collapse, countries with the cleanest balance sheets and strongest consumer balance sheets will fare the best. The week ahead Another deluge of data is on the docket this week. A cross section of earnings reports, consumer data and government bond auctions will dominate the headlines.
The US Treasury is returning to the primary market with another massive amount of supply. On Monday, the Treasury will sell 10-year TIPS ($10 billion); Tuesday brings 3-year notes ($40 billion), with Wednesday offering 10-year bonds ($21 billion) and the final auction on Thursday subsisting of 30-year bonds ($13 billion). Yields on the 10-year note have slowly crept towards the 4.0% level since early December. A break through that level would excite Treasury bears such Morgan Stanley, who expect the 10-year Treasury yield to jump to 5.5% by year end.
Retail sales will garner attention early in the week. Data from the previous week point to solid December gains, but remember that we are building off a terribly low base. Consumer price data on Friday is expected to push slightly higher, with the core rate likely to rise by 0.1%. Rent and owners’ equivalent rent has fallen in recent months as a glut of housing is weighing on prices.
Earnings season is once again upon us. Alcoa starts 4th quarter reporting after the close on Monday. Intel follows on Thursday, with JP Morgan set to report on Friday. These firms set the early tone for the rest of the earnings season, so they represent some of the more important releases to come out.
Finally, the 2010 Global Risk Report is published by the World Economic Forum on Thursday. It will take a look at events of the past year as well as those likely to materialize in the coming year.
Market Summary Week Ending January 8, 2010
Economic Data - Previous Week
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