This week, Congress approved a Continuing Resolution agreement to fund the government and raise the debt limits, but many of the government's economic releases were delayed into next week. The releases that were available showed softness in the U.S recovery, but a pick up of activity in China and Europe. Softness of the U.S. data suggested that the Fed would hold off the commencement of tapering its bond purchases until next year. On news of the re-opening, both equity and bond markets rallied, interest rates and credit spreads fell along with the U.S. dollar, energy commodity prices fell and metals commodity prices rose.

Perspective:

S&P estimated that the government shutdown cost the economy about $24 billion. Estimates for fourth-quarter GDP have been reduced six ticks to 2.4%. Paul Edelstein and Doug Handler, of IHS Global Insight, estimated the direct cost to GDP from the loss of government services at $3.1 billion. These estimates do not include some of the costs extending into the future associated with:

1. the loss of confidence in our leadership's ability to work together to solve our problems,
2. the higher interest costs that holders of U.S. debt will demand due to the risks of brinkmanship,
3. business hesitancy to invest with this added uncertainty, and
4. consumer's reduced confidence to spend.

The CR agreement extends spending authority to Jan. 15 of next year. These were high costs, but the question remains whether we learned from the experience.

A while ago our young golden retriever got a mouth full of quills chasing a porcupine in our back field. I held her while the vet pulled the barbed quills out of her skin and mouth — a painful experience. Yet, when I brought her home, the first thing she did was to run right back to where the porcupine had been. Our golden is smart for a dog, but unfortunately has not learned her lesson about porcupines and skunks. Over the next three months we will be able to see if our elected officials have learned anything from the quills and barbs they experienced over the last three weeks.

Economic Releases:

Due to the government shutdown, many of the market-moving releases were not available again this week. The number of people filing for jobless benefits was one of the few releases that was available since the number is an aggregation of filings in each State. Recent data was distorted by counting problems associated with a computer conversion in California, which accounted for the blip down and catch-up in prior weeks. The week of Oct. 12, Initial Claims for Unemployment benefits fell 15,000 to 358,000; the four-week average of Claims (blue in the chart) rose 12,000 to 336,500. Continuing Claims (red in the chart) fell 43,000 to 2.859 million. The numbers came in on the high end of expectations and may have been boosted by the government shutdown.

Other Economic Releases

The government shutdown prevented release of U.S. Housing Starts, but the National Association of Home Builders Housing Market Index for October slipped to 55, the low end of the range of expectations. Both the Philadelphia Fed and the Empire State Surveys for October fell.

Industrial Production in the European Union rose 1.0% in August. In Germany, the ZEW Survey for Current Conditions fell, but the Survey for Business Expectations rose in October. In the UK, the Labour Market Report for September beat expectations and showed solid performance of the UK economy even though the Unemployment Rate remained at 7.7%. UK Retail Sales increased +0.6% (also better than expected) in September.

China's third quarter GDP growth improved to 2.2% in the third quarter. Industrial Production grew +0.72% and Retail Sales increased 1.24% in September.

Equities Markets:

Equity markets increased again in the week the U.S. government agreed to reopen. Even bond markets rallied with the news with both falling interest rates and narrowing spreads. Both the higher equity values and lower credit spreads suggest that investors are willing to take more risk.

Bond Markets:

Bond yields fell and credit spreads narrowed on the week. Softer economic data suggested that the U.S. Fed would be on hold and not start tapering its bond purchases; therefore interest rates would remain low.

Currencies & Commodities:

The U.S. dollar fell on the week in anticipation that the Fed would push the start date for tapering out into the next year, keeping U.S. rates low. Interest rates and interest rate differentials are major drivers of changes in currency exchange rates. The lower interest rates in the U.S. put pressure on its currency. Energy commodity prices fell; metals commodity prices rose on the week.

Note: Economic Comments will not be published for the week ending Oct. 25.

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.