Economic Notes – January 14, 2013

January
14

Written by: Jon McGraw

(+) The NFIB small business optimism index rose to 88.0 in December, which was better than the 87.2 consensus expected. However, the index remains in the doldrums following last month’s severe drop. The primary negative component of the index was the expectations piece—respondents were generally pessimistic about the economy, although, at the same, time, there was a positive bias towards a willingness to expand their businesses. Employment prospects, which includes the ability to find qualified workers, remained steady. It seems some of the pessimism brought on by fiscal cliff concerns last month has dissipated a bit.

(+) Wholesale inventories for November were stronger than expected, up +0.6% versus an expected +0.2% gain. The drugs area a primary driver of activity that month.

(-) The November trade deficit widened more than expected, at -$48.7 billion versus an expected -$41.3 billion. Petroleum wasn’t as much of a culprit that month; instead, due to higher imports of automobiles and consumer goods. While a positive that we’re back to buying (the average age of our cars is the oldest it’s been in many years), we are still lacking that manufacturing push that would help build our exports—and close this gap. However, the widening may not be a multi-month phenomenon.

(+) On the other hand, import prices in December fell -0.1%, compared to an expected small gain of +0.1%. This is a positive to the extent that we’re not ‘importing’ a lot of inflation—which is something we watch. Much of the import pricing number are controlled by petroleum prices, which fell almost a percent in the month, after falling several percent in November.

(-) With prior week revisions, initial jobless claims rose to 371k, higher than the expected 365k for the Jan. 5 ending week. Continuing claims for the Dec. 29 week came in at 3,109k, which was a bit higher than the 3,228k expected. The initial claims average for the past several weeks has moved back to pre-hurricane-type levels, while continuing claims displayed a bit more volatility at year-end, which is somewhat normal. On a separate jobs note, the JOLTS (Job Openings and Labor Turnover Survey) came in at 3.676 million in November, right in line with expectations and a bit higher than the overall quoted unemployment rate.

Outside the U.S., we’ve seen some interesting developments in Japan, where Prime Minister Abe has announced a 10.3 trillion Yen ($116 billion) stimulus package intended to generate economic growth, and some inflation. Inflation is often colored as a bad word—in excess—but a small amount is a positive coincident byproduct of economic growth. Japan is facing a multi-decade environment of slow growth, which their low rates hadn’t helped in solving. Much of the issue is demographic—as an aging, shrinking nation, it has the opposite problem of what many emerging nations are facing (a growing working-age population). When you add high debt levels and a few cultural nuances, the problem is substantial. Despite all this, the Yen has shown a surprising amount of strength over the past few years, due to the nation’s reputation of fundamental quality and structural stability—however, with inflation perhaps looming, the Yen has lost ground in recent months. On the positive side, it makes Japanese exports more competitive and may provide an assist to corporate results in that regard. We will see if this all works.

Market Notes

 

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2012

0.05

0.25

0.72

1.78

2.95

1/4/2013

0.07

0.27

0.82

1.93

3.10

1/11/2013

0.07

0.26

0.78

1.89

3.05

 

Stocks had a generally good week, with earnings season beginning—led by decent numbers from both Alcoa and Wells Fargo. Health care and materials led from a sector standpoint, while defensive utilities and telecom fared the worst. Large-caps narrowly outperformed small-caps.

Internationally, developed nations Spain and Italy posted strong returns along with several other EU nations, while BRIC stocks lagged a bit on the week.

Despite a strong stock market, bonds also performed positively—especially on the long end of the yield curve. Developed market foreign debt outgained domestic issues, while emerging debt posted negative returns and the worst of all bond categories. In the U.S., municipals and several areas of credit performed well, with roughly double the return of the BarCap Aggregate.

In real estate, mortgage REITs led the way, followed by Asia and U.S. retail. European real estate lagged. Commodity markets were generally higher on the week by roughly a half a percentage point, in line with equities, led by strength in precious metals (platinum in particular) and several grains. Livestock and some industrial metals lost ground after recent strength in the former.

Have a great week!