Economic Outlook: A Slow News Week
- It was a fairly slow week for new data. New home sales continued their strong pace set in December. The January post was 481,000 units, on an annualized basis.
- The January CPI reading was -0.7% which brings the year-over-year reading to -0.2%. This negative reading, however, is almost entirely attributable to the decline in energy prices since January of 2014.
- Without the volatile energy and food components, the year-over-year CPI reading is +1.6%.
- The 4th Quarter GDP estimate was revised downward from 2.6% to 2.2%, which was not unexpected. The effect of inventories was the main reason for the adjustment.
- The Euro-zone Economic Sentiment Index (released by the EU) was revised up for January and rose again in February by 0.7%. This tends to confirm our view that Europe is on the mend, though obviously there is a lot of room to go and they are not out of the woods yet.
Equities Outlook: Don’t Look Now
- Surprise, surprise… Foreign equities are up more than 6.0% year-to-date (measured by the EAFE International Index), roughly double the performance of the U.S. market as measured by the S&P 500 Index (up roughly 2.5%).
- Returns of Emerging Market equities have also outpaced U.S. equities year-to-date, but not by as wide a margin. They are up about 4.0%.
- Kerry Craig, of JP Morgan Asset Management in London, commented to Bloomberg regarding the performance: “A lot of the negative stuff that was supposed to blow up in the past month didn’t.”
Fixed Income Markets: Capitulation?
- The interest rate on the 10-year U.S. Treasury Note ended last week at 2.0% on Friday. This was a pullback in yield from the previous week and a reversal of a four week trend of upward movement in yield. Last week’s closing yield was 2.11%.
- European bond markets are expressing confidence in the ECB moves as bonds in the peripheral countries are behaving better. Spreads on Italian bonds have narrowed versus the German government bonds to less than 100 basis points.
- Some of the deflation doomsayers in the bond market are changing their tune. Michael Althof of PIMCO, which runs the world’s biggest bond fund said last week: “Inflation might be low, but it’s not dead. With all central banks around the world working in the same direction to generate growth and higher prices, the case remains for higher inflation.”
The Week Ahead
- U.S., Personal Income and Outlays (BEA)
- U.S., Construction Spending (Census, Dept of Commerce)
- U.S., ADP Employment Report (ADP)
- U.S., Fed Beige Book released
- U.S., Employment Report (BLS)