Economic Notes for January 23rd

Headline inflation, measured by the Consumer Price Index (CPI), was unchanged in December, while the ‘core’ number that excludes food and energy was slightly higher (+0.1%).  During the month, rent inflation was bit higher, but clothing and auto prices fell.


The year-over-year CPI number for 2011 was +3.0% (+2.2% for core CPI).  We’ve seen the rate of inflation abate in recent months, as food prices have moderated and the rise of certain energy components (WTI crude) has been offset by steep declines in others (natural gas).  While a little bit of inflation is a helpful and positive byproduct of economic activity, low levels overall act as a much better input than high inflation—obviously—as looked at by business and consumer budgets.  Lower inflation inputs should also help boost corporate earnings as they translate through the process.


Initial unemployment claims fell to 352,000 for the January 14th ending week, which was lower than expected, 50,000 lower than the week prior, and reflected a bit of ‘usual seasonal volatility’ (according to the DOL).  Continuing claims are also much lower.  Year-end figures are always a bit sporadic due to seasonal adjustments, changes to payrolls and holiday employment, but the trend continues to be lower as the job situation in general has been improving.


The headline Producer Price Index (PPI) fell -0.1% for December, in contrast to expectations for a slight increase, while the ‘core’ PPI number gained +0.3% for the month.  The difference was mostly caused by a nearly 1% drop in usually-more-volatile gasoline and food products (which aren’t included in the ‘core’ core figure).  A good part of the core increase came from light truck prices, which rose 1% on the month, although passenger vehicles, prescription drugs and tobacco helped.  Year-over-year, the core PPI is up 3.0%, which is the highest it’s been since June 2009—producer inflation is another byproduct of improved economic activity.


U.S. factory output soared in December, up +0.9%, according to the Federal Reserve, which is the largest increase in a year.  While output levels remain a few percentage points below the pre-recession peak, they are up +14% from the recession’s low in June of 2009.  In the second half of 2011, these figures were generally aided by more car purchases by consumers, and more capex machinery and technology spending by businesses, as well as inventory restocking activity.


Industrial production for December gained +0.4%, which was nearly on target of what was expected, and was revised higher for several earlier months.  Capacity utilization remained consistent with expectations at 78.1%.  Manufacturing output increased by +0.9%, which was led by motor vehicle assemblies, machinery and computers/electronics—in keeping with other metrics.


The monthly Homebuilders’ survey rose from 21 to 25 over the past month to the highest level it’s been since early 2007.  This survey is comprised of three parts:  present home sales, expected home sales and prospective buyer traffic—which can change on a dime—but the  higher level of positivity is interesting.  Housing starts fell to 675k in December, which was larger than anticipated, but the bulk of the damage came from multi-family starts (and was a bit of a reversion from the huge month for that component in November).  Existing home sales were up +5.0% for December, which was largely in line with expectations.  The number of homes offered for sale fell, while the ‘months supply’ of homes inventory fell from 7.2 to 6.2.  The median price also rose a bit from mid-2011, so there were some positive elements sporadically the housing story.



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Rumors of an agreement being reached on the Greek restructuring plan buoyed risk assets overall later in the week.  U.S. stocks were strong on the week, as they have been year-to-date.  From a sector standpoint, technology and consumer discretionary performed best, while defensive utilities and consumer staples underperformed.  So far, while less than 10% of S&P firms have reported earnings, roughly half have beaten them—but more to come from some key companies this week.  Ironically, the weakest areas of 2011 have been the strongest so far this year, such as emerging markets, which are up nearly 9% so far in January.  Insofar as the Extended model holdings are concerned, these areas have contributed to attractive portfolio returns during the first few weeks.


Bond prices were down with improved optimism on economic prospects and yields inching higher—back up over 2% on bellwether 10-Year Treasury.  Treasuries are having their worst yearly start since 2003, in fact, despite their popularity last year.  Corporate credit, including high yield, though, have outperformed.  Foreign debt also performed positively.


In commodity markets, silver traded much higher on the week, as did lead and nickel in the industrial metals area.  Natural gas, as has been the trend over the past several months, lost another 10% on a warmer than average winter and concerns of oversupply.  Gas, a volatile contract anyway, is down 2/3 from its price a year ago.


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, Yahoo!, Standard & Poors, MSCI, Barclays Capital, JPMorgan Asset Management, Northern Trust, Oppenheimer Funds, PIMCO.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.


The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.  Schroeder Financial Services, Inc. is a registered investment advisor.