Market Commentary by Scott J. Brown, Ph.D., Chief Economist
The economic data were mixed, but mostly positive. Real GDP rose at a 3.2% annual rate in Q410, a bit below the consensus forecast, but the details were relatively strong. Inventory growth slowed sharply, subtracting 3.7 percentage points from headline GDP. Exports continued to advance, but imports fell (note that imports have a negative sign in the GDP calculation), and combined, net exports added 3.4 percentage points to GDP growth.
Consumer spending rose at a strong 4.4% annual rate, partly reflecting a drop in the savings rate. Business fixed investment also rose 4.4%, slower than in recent quarters, but still positive. The sharp deceleration in inventory growth (assuming it holds up in revisions) suggests strong GDP growth in the near term (as inventory growth picks back up). Note that the 2% reduction in payroll taxes will boost disposable income and support consumer spending growth in early 2011.
As expected, the Federal Open Market Committee left short-term interest rates unchanged, retained its conditional commitment to keep rates low for “an extended period,” and made no changes to its asset purchase program. In his State of the Union Address, President Obama adopted more business-friendly rhetoric. The stock market continued to struggle with good news.
Next week, the economic calendar remains packed. Friday’s job market report is the clear highlight, but investors will also be interested in the ISM surveys and will want to hear what Fed Chairman Bernanke has to say on Thursday (the topic is “The Economic Outlook and Macroeconomic Policies”). Nonfarm payrolls are expected to post a moderate increase in January, but the seasonal adjustment is huge (we normally lose about 2.8 million jobs each January, before seasonal adjustment). Note that the establishment survey data will include annual benchmark revisions (in October, the Bureau of Labor Statistics estimated that these revisions would lower the March 2010 level of payrolls by about 366,000). The unemployment rate fell in December, due largely to a decrease in labor force participation – we should see a partial rebound in January.
Indices
| Last | Last Week | YTD return % | |
| DJIA | 11989.83 | 11822.8 | 3.56% |
| NASDAQ | 2755.28 | 2704.29 | 3.86% |
| S&P 500 | 1299.54 | 1280.26 | 3.33% |
| MSCI EAFE | 1715.65 | 1672.17 | 3.46% |
| Russell 2000 | 795.43 | 778.08 | 1.50% |
Consumer Money Rates
| Last | 1-year ago | |
| Prime Rate | 3.25 | 3.25 |
| Fed Funds | 0.18 | 0.13 |
| 30-year mortgage | 4.84 | 5.16 |
Currencies
| Last | 1-year ago | |
| Dollars per British Pound | 1.591 | 1.618 |
| Dollars per Euro | 1.370 | 1.404 |
| Japanese Yen per Dollar | 82.930 | 89.440 |
| Canadian Dollars per Dollar | 0.993 | 1.067 |
| Mexican Peso per Dollar | 12.039 | 12.944 |
Commodities
| Last | 1-year ago | |
| Crude Oil | 85.64 | 73.67 |
| Gold | 1322.10 | 1086.40 |
Bond Rates
| Last | 1-month ago | |
| 2-year treasury | 0.55 | 0.63 |
| 10-year treasury | 3.34 | 3.33 |
| 10-year municipal (TEY) | 5.51 | 5.28 |
Treasury Yield Curve – 1/28/2011
S&P Sector Performance (YTD) – 1/28/2011
Economic Calendar
| January 31st | — | Personal Income and Spending (December) Chicago Purchasing Managers Index (January) |
| February 1st | — | ISM Manufacturing Index (January) Construction Spending (December) Motor Vehicle Sales (January) |
| February 2nd | — | Announce Corporate Layoff Intentions (January) ADP Payroll estimate (January) |
| February 3rd | — | Jobless Claims (week ending January 29th) Nonfarm Productivity (4Q10, preliminary) ISM Non-Manufacturing Index (January) Bernanke Speech (and Q&A) to National Press Club |
| February 4th | — | Employment Report (January) |
| February 15th | — | Retail Sales (January) |
| February 17th | — | Consumer Price Index (January) |
| February 21st | — | Presidents Day (markets closed) |
| March 15th | — | FOMC Meeting |
Important Disclosures
Past performance is not a guarantee of future results. There are special risks involved with global investing related to market and currency fluctuations, economic and political instability, and different financial accounting standards. The above material has been obtained from sources considered reliable, but we do not guarantee that it is accurate or complete. There is no assurance that any trends mentioned will continue in the future. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Investing involves risk and investors may incur a profit or a loss.
US government bonds and treasury bills are guaranteed by the US government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. US government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the US government.
Commodities trading is generally considered speculative because of the significant potential for investment loss. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Specific sector investing can be subject to different and greater risks than more diversified investments.
Tax Equiv Muni yields (TEY) assume a 35% tax rate on triple-A rated, tax-exempt insured revenue bonds.
Material prepared by Raymond James for use by its financial advisors.
The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Data source: Bloomberg, as of close of business January 27th, 2010.
©2011 Raymond James Financial Services, Inc. member FINRA / SIPC.
