Economic Notes – December 30, 2013

December
31

Written by: Jon McGraw

During the holiday-shortened week, we received a small dose of economic data. For the most part, the news was positive: consumer confidence rebounded while shopping for the holiday season, a stronger than expected number of durable goods orders in November, seasonally adjusted jobless claims continuing to edge downward, etc.

(-/0) Personal Income in November grew 0.2% from October, below a consensus expected increase of 0.5%. Consumer spending measured by personal consumption expenditures (PCE) outpaced personal income growth. The PCE was up 0.5%, in line with the market expectation. Shoppers boosted their spending on durable goods at a monthly rate of 2.2% heading to the holiday season. In particular, over half of the increase in November consumer spending was contributed from motor vehicles and parts purchases. Personal savings as a percentage of disposable personal income dipped slightly to 4.2% in November from 4.5% in the prior month.

(+/0) The headline price index for PCE was flat month-over-month in November. Excluding food and energy, core PCE price index increased 0.1% as the market expected. Over the last 12 months, headline PCE prices grew 0.9% and the core price index was up 1.1%. Both measurements are well below the Fed’s 2% target. Inflation continues muted.

(0) The final University of Michigan Consumer Sentiment index for December came in at 82.5, unchanged from the preliminary estimate, but slightly below the market consensus of 83. Consumer confidence rebounded as the index was up 9.9% from November’s low reading of 75.1. Most of the improvements were due to more confidence in current economic conditions, such as more purchasing plans due to renewed discounting activities. Compared to December 2012, the index has gained 13.2% from 72.9.

(+) New orders for manufactured durable goods in November grew 3.5% to $241.6 billion, exceeding the bullish consensus growth rate of 2.2%. The upside surprise was mainly due to a 21.8% surge in new orders of nondefense aircraft and parts. Excluding the volatile transportation component, the new orders increased 1.2%. Without seasonal adjustment, the year-to-date new orders sales have risen 5.3% to $2.5 trillion on a year-over-year basis. It continues to point to a positive longer-term trend.

(+/0) As the market consensus expected, the Federal Housing Finance Agency (FHFA) House Price Index (HPI) rose 0.5% in October. States in the Pacific and Mountain census divisions saw the largest gains of 1.1% and 1.2% respectively. Nationally, U.S. house prices appreciated 8.2% from a year ago. The HPI index is roughly at the same level as of April 2005, still 8.8% below its April 2007 peak price level.

(+/0) According to the National Association of Home Builders, single-family new home sales in November declined 2.1% to a seasonally adjusted annual rate of 464k units; however, this was better the consensus estimate of 440k units. Both the West and Northeast posted strong numbers, up 31.1% and 15.2% respectively. New home sales in the Midwest and the South decreased 26.2% and 9.1%. The inventory of new homes for sales is tight, a 4.3-month supply at the current sales pace.

(+/0) Initial jobless claims for the week ending Dec. 21 came in at 338k after seasonal adjustment. The reading improved more than the consensus forecasted figure of 350k. The four-week moving average was 348k. During the comparable week in the prior year, the initial claims figure was 366k, 8.3% higher than 338k for the week of Dec. 21. Continuing claims for the week ending Dec. 14 came in at 2,923k, which was higher than the 2,850k expected. The total number of people claiming benefits in all programs for the week ending Dec. 7 shows there were 4.28 million people depending on government support, which was roughly 1.2 million lower than the 5.47 million in the comparable week in 2012.

Market Notes

To prevent another government shutdown in mid-January 2014, both the Senate and the House approved a new budget deal. On December 26, President Obama signed the “Bipartisan Budget Act of 2013” into law. The budget agreement sets overall federal spending plans for the next two fiscal years in 2014 and 2015.

The budget deal and the Fed’s confirmation of a small asset purchase taper starting in January provided much-needed certainties for investors entering 2014. During the past week, the IMF Managing Director Christine Lagarde commented that she expects the fund to raise its current 2.6% real GDP projections for the U.S. in 2014.

With positive news from the economic and political fronts, the U.S. equity market had a nice Santa Claus rally. The S&P 500 index gathered momentum and went on breaking off three all-time-high closing records. The index almost touched the 1,850 level, which was more than 400 points or 28.7% higher than its close at the beginning of the year. With dividend income, the S&P 500 index is up roughly 32% for the year to date, on track to finish as the best year since 1997. For the week, economic sensitive sectors such as energy, basic materials, and technology stocks outperformed. Defensive stocks such as consumer staples and utilities stocks lagged.

Outside the United States, European stocks beat Pacific developed country stocks. Investors are looking for bargain deals in Europe. The legendary investor George Soros invested close to $100 million in one of the leading Spanish construction companies, which also received a large number of share investment from Bill Gates in October. During the week, the MSCI EM index underperformed the MSCI EAFE index by 1.4%.

The U.S. economy continues on a solid recovery path. The 10-year Treasury yield surpassed 3% for the first time since summer 2011. Bonds lost ground during the week. Long-term government bonds performed the worst. Foreign-developed sovereign bonds declined 25 bps measured by the Citi Non-U.S. World Government Bond index.

Foreign REITs returned 1%, outperforming U.S. REITs by 68 bps in the week. The energy heavy S&P GSCI Commodity index earned 0.56% and beat the more diversified Dow-Jones UBS Commodity index by 54 bps.

Here’s wishing you a prosperous 2014!