Economic Notes for the Week of December 5th

This has been another interesting week from a news standpoint.  The ECB, Federal Reserve and other major central banks coordinated efforts to enhance the availability, extend the expiration date and lower the pricing of dollar loans through liquidity swaps—the prices of which were lowered from 1.00% to 0.50% over the applicable ‘OIS’ (or Overnight Indexed Swap rate, a type of prime rate for such instruments).  Secondly, these central bank policymakers offered temporary additional swap lines in any of their currencies/jurisdictions (other than the dollar only), should they be needed.

Much of the detail here is operational in nature, which isn’t the important part—the critical piece is the coordination and the boosted confidence such an action (and related series of actions) can bring to the global economy.  We believe such coordinated actions and use of a ‘backstop’ is critical to market confidence (as many were in 2008).  Last week’s results were proof in point.

Housing saw several data releases.  New home sales rose +1.3% in October, which was slightly more than expected, but older data was revised downward, which tended to offset some of this effect.  The Case-Shiller number, which lags, reported a -0.6% decline for September.  This was a bit lower than expected and took the year-over-year number to a -3.6%.  It is interesting t note that the seasonally-adjusted version of the index is now at its lowest level since April 2003.

Consumer confidence improved significantly in November, up from 40.9 to 56.0.  The ‘expectations’ component of the survey was the most significant piece of the improved report, and is a positive sign.  Job market perceptions were also improved.  Remarkably, the overall levels of confidence now are only just below those reported during the summer’s debt ceiling debacle.

The ISM survey was higher than expected in November, as it moved from 50.8 to 52.7—as a result of improvement in new orders and production.  Construction spending also rose—mostly in private residential, which may help Q4 GDP growth.  The Chicago purchasing managers’ index also increased, which was a bit of a surprise, from 58.4 to 62.6.  Here also, new orders and production were additive and prices paid fell (lower prices paid implies lower inflation in goods).

In the employment situation report, nonfarm payrolls were up by 120,000 and the unemployment rate unexpectedly fell to 8.6%.  The U-6 measure of ‘underemployment’ also fell significantly.  While part of the improvement was due to fewer labor force participants, employment growth surveys were more positive than expected.  The ADP report for the week was also strong, showing an increase of 206,000 jobs.  Overall, recent job reports, while not outstanding, have been pointing to slow improvement in employment and less labor ‘slack,’ which may, in turn, inspire better confidence.  The snowball effect here is often subtle, but important.

It’s also worth noting another area of seasonal interest:  retail sales.  A fair bulk of the nation’s retail sales for the year are directly dependent on the Holiday season.  The National Retail Federation reported a record number of shoppers visiting stores/internet sites over the Black Friday opening weekend, which was up nearly 7% from last year (at 226,000,000 shoppers—believe it or not).  The amount spent per shopper was also up 9% from last year.  Results from other surveys were similar, and showed decent growth from last year’s Christmas figures.  Anecdotally, company reports in the retail and electronics sectors have also been strong this season so far.  While shopping for the Holidays over the internet has been a multi-year trend, it appears that foot traffic in malls and other ‘brick-and-mortar’ locations has also been strong so far.

Market Notes

Period ending 12/2/2011

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Nothing quite like seeing almost a year’s worth of returns in five days.  Broader U.S. equity markets experienced their best week since 2009, as decent economic/jobs data piggybacked on the coordinated actions to assist Europe.  U.S. markets were led by the more cyclical energy and financials sectors, while the lower-beta utilities and consumer staples sectors lagged in the S&P (the opposite of the prior week).  Despite the good showing from U.S. large-caps, small caps performed even more strongly, and foreign issues overall (especially those in sensitive emerging markets) outperformed U.S. markets.

Real estate and commodity returns were also positive as a whole, but lacked the strong absolute numbers seen in equity markets.  In the commodity world, economically sensitive industrial metals such as copper and lead saw strong gains, as did crude oil, while grains and ‘softs’ were weaker on average.

With rising expectations and lessening recession risks, bond yields moved higher and pressured prices on the Treasury side.  High yield and other corporate credit fared well in the ‘risk-on’ week, as did emerging market bonds with tightening spread levels.


Enjoy the week.

Karl Schroeder, RFC, CSA, CEP

Investment Advisor Representative

Schroeder Financial Services, Inc.


Sources:  FocusPoint Solutions, Goldman Sachs, Morgan Stanley, Morningstar, Payden & Rygel, Deutsche Bank, Wells Capital Management, Bloomberg, Reuters, Standard & Poors, MSCI, Barclays Capital, JPMorgan Asset Management, Oppenheimer Funds, PIMCO.  Index performance is shown as total return, which includes dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar terms.