John Davidson's Economic Comments: Week ending Dec. 13
This week's economic releases showed that the U.S. economy continued to expand, but has not accelerated since the government shutdown. Most equity markets were lower on the week in anticipation of tapering of the Federal Reserve's quantitative easing bond purchases. Bond market yields were slightly lower, but held onto most of the prior week's increases. Credit spreads narrowed in a sign that investors are willing to be paid less to take on credit exposure. Oil prices declined, but natural gas and metals prices increased on the week.
Perspective:
What will the Fed see when it looks at the data at the Federal Open Market Committee meeting next week? The U.S. economy is part of a synchronized global expansion, that has not yet accelerated. Economic activity has picked up since the government shutdown. Inflationary pressures appear to be well contained. This week's federal budget agreement, approved by a 332-94 vote, was a significant positive in taking away the uncertainty of another shutdown for the next two years; (this week, the Senate will likely support the agreement.)
Talking heads have put too much emphasis on whether the U.S. Fed will begin tapering its bond purchases (QE3) in December. International Strategy & Investment Group’s Ed Hyman pegs the probability of a taper at 35%. The question of whether the taper begins in December or next January or March matters little. The real question is whether the Fed's other tools, such as forward guidance or, recently discussed, repo market activities, will be effective in managing a slow rise in interest rates instead of a rapid spike that might snuff out the recovery. Fed Chairman's Ben Bernanke has been effective in developing and utilizing new tools, such as quantitative easing, in managing monetary policy. The Federal Reserve appointments of Janet Yellen and Stan Fischer to be chair and vice-chair, respectively, should give the markets confidence in the continuity of leadership with the creativity and skills necessary to craft and implement effective new monetary policies.
Economic Releases:
The Initial Claims for Unemployment rebounded to 368,000 the week of Dec. 7, above the range of estimates; Some of the increase may be explained by holiday adjustments. The four-week average of Claims (blue in the chart) rose to 328,750. Continuing Claims (red in the chart) rose 40,000 to 2.791 million. Even though this week's report of Claims are at the highest level since the government shutdown, the chart shows that the Claims have improved to close to pre-Great Recession levels.
The November Retail Sales report showed that the holiday season has been better than many of the retailers have expected. Retail Sales (blue in the chart) rose +0.7%; ex-auto's Sales (red in the chart) rose +0.4%. October Retail Sales were also revised higher. Surveys show that much of the growth in Sales have come from on-line purchases.
Other Economic Releases
Meanwhile, inflationary pressures have been kept at bay. In the U.S., Producer Prices fell -0.1% in November; year-over-year they rose only +0.7%. Even without the more volatile food an energy component, PPI rose only +0.1% from the October and 1.3% from the previous November.
In the Eurozone in October Industrial Production fell -1.1% from the previous month; Germany experienced a -1.2% decline; France fell -0.3% in October.
In November Industrial Production in China expanded +0.76% and Retail Sales increased 1.32%.
Equities Markets:
The uncertainty over the Fed's meeting next week weighed on the markets. Good news on the economy was treated as bad news for equities because it increased the odds that the Fed would begin tapering its bond purchases. Only the Nikkei rose for the week. The Merrill Lynch BOA Bond Credit Market Indices posted positive returns.
Bond Markets:
Bond yields were mixed and little changed on the week, holding on to much of the previous week's post-employment report gains. Credit spreads narrowed; since they are reported on a one-day lag, the impact of the strong US employment report is reflected in this week's numbers.
Currencies & Commodities:
The U.S. dollar rose against the Yen, Pound, and Looney, but fell against the Euro again this week. Oil prices fell, but natural gas and metals commodity prices rose on the week.
Who is John Davidson?
John W. Davidson, CFA, started writing these Comments more than a decade ago as a personal discipline when he was promoted to from portfolio manager to chief investment officer and CEO.
Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.
He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.
His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.
His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.
Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.
Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.
In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.
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