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Market Commentary by Scott J. Brown, Ph.D., Chief Economist
The economic data were mostly in line with expectations, generating relatively little reaction in the financial markets. Personal income and spending figures rose moderately in November. However, spending figures for September and October were revised significantly higher – implying that inflation-adjusted consumer spending (70% of overall Gross Domestic Product) is on track for more than a 4% annual rate in Q410 (vs. +2.4% in Q310 and +2.2% in Q210). In contrast, shipments of nondefense capital goods excluding aircraft trended at a much more moderate pace in the first two months of the fourth quarter (implying that business fixed investment will make a more modest contribution to Q410 GDP growth).
The PCE Price Index ex-food & energy, the Fed’s key inflation gauge, edged up 0.1% in November and was up just 0.8% over the last 12 months (too low for the Fed’s comfort). Real GDP rose at a 2.6% annual rate in the 3rd estimate for Q310 (vs. 2.5% in the 2nd estimate and +2.0% in the advance estimate), with inventory growth revised higher. A slower pace of inventory growth should subtract from GDP growth in Q410 or in Q111.
Market activity was relatively thin, as usual during this time of year. Investors are likely to continue debating the economic outlook for 2011. Oil prices are always a wildcard in the economy outlook. Crude has now risen to a little over $90 per barrel. Some of the recent increase is likely due to cold weather in North America and Europe. The average price of gasoline is a little over $3 per gallon, a level which has had a negative impact on consumer spending in the past. However, a reduction in payroll taxes arrives in January, which will boost disposable income.
Next week, the economic calendar is thin. Consumer confidence is likely to improve further in December, but should remain relatively low by historical standards. There could be minor market reactions to any surprises in the Chicago purchasing managers data or the Pending Home Sales Index. The bond market will face Treasury supply ($99 billion in 2-, 5-, and 7-year notes to be auction Monday, Tuesday, and Wednesday). Looking ahead, the data for the first week of 2011 will be important for the markets. The December Employment Report will be critical to the near-term outlook.
Consumer Money Rates
Treasury Yield Curve – 12/23/2010
S&P Sector Performance (YTD) – 12/23/2010
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.
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 December 22nd, 2010.
Frazier Allen, WMS, CRPS, Financial Advisor with F&M Bank
Web Site: http://www.raymondjames.com/frazierallen
TopicsCapacity Utilization, Consumer Price Index, Economic Data, European Debt, Federal Open Market Committee, Financial Markets, Frazier Allen, Global Equity Markets, Gross Domestic Product, Index of Leading Economic Indicators, Manufacturing Output, Raymond James, Raymond James Investment Services, Scott J. Brown, Seasonal Adjustment, Short-Term Interest Rates, Volatility, Weekly Market Snapshot
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