Our economic landscape is anything but normal. The fits and starts, ups and downs, hills and valleys remain challenging and all assertions to the contrary are not about to change anytime soon. Those in Washington continue to try to put a happy face on our economy. Those on Wall Street revel in the easy money and try to project a populist image. But those on Main Street are paying the price in terms of navigating the real challenges of our economy.
With most eyes fixated on problems here at home, the real issues in the global markets occurred in the Euro-zone. Is Greece close to a sovereign default? Would that create a chain reaction? The Euro continued to give ground this week and our greenback benefited in the process. Given the negative correlation between our greenback and many sectors of the equity, commodity, and bond markets, volatility remains a concern and risks remain high as we go into year end.
We continued to see a semblance of this phenomena play out again this week. Will it continue? Watch the U.S. Dollar Index and expect that it will continue to be negatively correlated with the markets.
Let’s navigate. Prior to reviewing the month to date market returns, I’ll address economic data released this week.
ECONOMIC DATA (sourced from The Wall Street Journal):
Producer Price Index:
The overall PPI jumped 1.8 percent in November after gaining 0.3 percent in October. The boost in the latest month far exceeded the market forecast for a 1.0 percent increase. The November gain was led by a 6.9 percent spike in energy and a 0.5 percent gain for food.
Empire State Manufacturing Survey:
Month-to-month growth slowed to a crawl in the New York manufacturing region, according to the Empire State index which barely came in above zero for the December reading, at 2.55 vs. far stronger rates of growth in November (23.51) and October (34.57). Nearly everything is slowing this month: new orders 2.20 vs. November’s 16.66, shipments 6.30 vs. 12.97, employment -5.26 vs. 1.32, workweek -5.26 vs. 5.26, and unfilled orders, -21.05 vs. -2.63. The month-to-month contractions in unfilled orders and the workweek are bad news for the area’s factory workers, especially those that are unemployed right now.
We are getting mixed numbers for the manufacturing sector today-but for different months. Although the December Empire State index slowed to a crawl, the industrial production figure for November was quite healthy. Overall industrial production in November ramped up 0.8 percent, following a revised no change figure for October.
Consumer Price Index:
The consumer price report for November was calming on most financial markets despite the rise in the headline number. Both the headline and core numbers were much less inflationary than yesterday’s scary PPI numbers. Headline consumer price inflation jumped 0.4 percent in November after gaining 0.3 percent the month before. The November headline matched the consensus forecast. Core CPI inflation-in contrast with yesterday’s core PPI run up-eased to 0.0 percent (no change) after a 0.2 percent increase in October.
Initial Jobless Claims:
Initial jobless claims rose slightly in the Dec. 12 week to 480,000 vs. expectations for 465,000, a mild disappointment that doesn’t derail the trend which points to a bottoming for the labor market.
Leading Economic Indicators:
The Conference Board’s index of leading economic indicators rose a strong 0.9 percent in November, signaling steady economic growth in the first half of the New Year. The yield curve continues to dominate the index, once again the largest contributor reflecting low rates that are near zero, offset only in part by very low high rates at just over 3 percent.
Philadelphia Fed Survey:
The Philadelphia Fed report is not confirming softness seen earlier this week in the Empire State report. Philadelphia’s headline index rose more than 3-1/2 points to 20.4 indicating strong month-to-month acceleration in the region’s manufacturing sector, a contrast to the Empire State index which came in only a bit above zero.
What do I make of all this economic data? Consistently inconsistent. The fact is, the economy is trying to gain a footing and develop a foundation but the ground is unsettled and largely supported by funds from Washington. The challenge for the economy and markets going into 2010 is how things will play out as Washington withdraws its support.
Let’s review the market’s reaction to all this data. The statistics provided are the weekly close and the month to date returns.
$/Yen: 90.42 versus 86.38, +4.7%
Euro/Dollar: 1.4330 versus 1.5007, -4.5%
U.S. Dollar Index: 77.77 versus 74.80, +4.0%
Commentary: the overall U.S. Dollar Index continued to firm this week. Was it economic strength here at home that drove the dollar higher? Not in my opinion. The greenback benefited from the potential sovereign defaults in the Euro-zone, especially Greece.
Oil: $73.05/barrel versus $77.33, -5.5%
Gold: $1113.2/oz. versus $1180, -5.7%
DJ-UBS Commodity Index: 135.490 versus 136.49, -.73%
Commentary: commodities remain in negative territory for the month, but benefited this week given reports that oil supplies have dwindled. The bloom has come off the gold market as the greenback has regained favor.
DJIA: 10,329 versus 10,345, -.01%
Nasdaq: 2211 versus 2145, +3.1%
S&P 500: 1102 versus 1096, +.5%
MSCI Emerging Mkt Index: 950 versus 941, +1.0%
DJ Global ex U.S.: 194.9 versus 197.04, -1.0%
Commentary: very interesting price action in the equity markets this week. Global equities and emerging markets retraced by 2-2.5%. The pressure in those markets dragged our domestic major market averages down by .5 to 1.5% 0n the week. The Nasdaq held up well given positive earning news from some tech companies, primarily Oracle.
With the shift in focus toward concerns globally and in emerging markets, our equity markets remain vulnerable to a further rally in the greenback.
2yr Treasury: .80% versus .67%, +13 basis points or .13% (rates up, prices down)
10yr Treasury: 3.55% versus 3.20%, +35 basis points or .35% (rates up, prices down)
COY (High Yield ETF): 6.67 versus 6.46, +3.2%
FMY (Mortgage ETF): 18.10 versus 17.79, +1.7%
ITE (Government ETF): 57.98 versus 58.52, -1.0%
NXR (Municipal ETF): 14.70 versus 14.80, -.06%
Commentary: bonds were relatively flat on the week, but remain down on the month. When and how will the Fed withdraw stimulus and support for the markets? How will private capital fill that void? That dynamic will be THE story for 2010.
As the markets prepare for two weeks of holiday-mode, global risks remain rampant. Although our markets have rebounded nicely this year, I continually see risks which I highlighted last spring (sovereign defaults in the Euro-zone, housing, municipal problems, crowding out) and throughout the year across our economic horizon.
What will the impact of these risks be on the global economy and markets in 2010 as governmental supports are lessened? I shudder to think that these governmental supports would be increased, thereby further impeding free market capitalism. Do we embrace private market principals or do we move toward an increased socialist model? Will Wall Street continue to dominate Washington? So much to address. So fascinating and truly historic. 2010 will continue to hold many surprises in store for us as we navigate the economic landscape.