Market Commentary by Scott J. Brown, Ph.D., Chief Economist
Investors remained focused on political developments in the Middle East and North Africa. The turmoil in Libya led to a drop in oil production (less than 1% of global output), higher oil prices, and a dampening of U.S. stock market sentiment. Assurances that other producers could make up for the Libyan shortfall helped stem the rise oil prices, although broader worries remain. At the end of the week, gasoline futures suggested about a $3.60 average price for a gallon of gasoline – the increase in gasoline prices, if sustained, would offset much of the positive benefit (to consumer spending) of lower payroll taxes.
The economic data were mixed, partly reflecting unfavorable weather in January. The estimate of real GDP growth for Q410 was revised down (to a +2.8% annual rate, vs. +3.2% in the advance estimate). Consumer spending growth was revised lower (to 4.1% from 4.4%), as anticipated, and business fixed investment was a bit higher (mostly business structures). Oddly, there was virtually no revision in either inventories (which subtracted 3.7 percentage points from GDP growth in 4Q10) or in net exports (which added 3.4 percentage points). State and local government expenditures fell at a 2.4% annual rate (vs. -0.8% in the advance estimate), reflecting budget strains.
Next week, the calendar is packed. Fed Chairman Bernanke’s monetary policy testimony is always a big deal for the financial markets, but there is less suspense this time around (the minutes of the January 25-26 Fed policy meeting included revised projections of growth, unemployment, and inflation, and there was an extensive discussion of the economic outlook). Noted Fed critic Ron Paul will chair the inquisition on Wednesday. The ISM surveys were strong in January and it will be interesting to see whether that strength will carry into February. In the February Employment Report, nonfarm payrolls are generally expected to rebound from January’s poor weather. However, the weather was also bad in February (hence, a weather-related rebound may be more likely in March). The unemployment rate has become less reliable in recent months. The employment-to-population ratio, a better measure of labor market slack, has been little changed over the last year.
Indices
| Last | Last Week | YTD return % | |
| DJIA | 12068.5 | 12318.14 | 4.24% |
| NASDAQ | 2737.9 | 2831.58 | 3.21% |
| S&P 500 | 1306.1 | 1340.43 | 3.85% |
| MSCI EAFE | 1714.78 | 1753.83 | 3.41% |
| Russell 2000 | 804.18 | 834.02 | 2.62% |
Consumer Money Rates
| Last | 1-year ago | |
| Prime Rate | 3.25 | 3.25 |
| Fed Funds | 0.16 | 0.12 |
| 30-year mortgage | 4.87 | 5.12 |
Currencies
| Last | 1-year ago | |
| Dollars per British Pound | 1.613 | 1.542 |
| Dollars per Euro | 1.379 | 1.355 |
| Japanese Yen per Dollar | 81.780 | 90.130 |
| Canadian Dollars per Dollar | 0.984 | 1.056 |
| Mexican Peso per Dollar | 12.168 | 12.839 |
Commodities
| Last | 1-year ago | |
| Crude Oil | 95.78 | 79.75 |
| Gold | 1413.83 | 1095.40 |
Bond Rates
| Last | 1-month ago | |
| 2-year treasury | 0.74 | 0.55 |
| 10-year treasury | 3.44 | 3.34 |
| 10-year municipal (TEY) | 5.09 | 5.51 |
Treasury Yield Curve – 2/25/2011
S&P Sector Performance (YTD) – 2/25/2011
Economic Calendar
| February 28th | — | Personal Income and Spending (January) Chicago Purchasing Managers Index (February) Pending Home Sales Index (January) |
| March 1st | — | ISM Manufacturing Index (February) Construction Spending (January) Bernanke Monetary Policy Testimony (Senate) Motor Vehicle Sales (February) |
| March 2nd | — | Corporate Layoff Intentions (February) ADP Payroll Estimate (February) Bernanke Monetary Policy Testimony (House) Fed Beige Book |
| March 3rd | — | Jobless Claims (week ending February 26th) Productivity (Q410, revised) ISM Non-Manufacturing Index (February) |
| March 4th | — | Employment Report (February) |
| March 10th | — | Trade Balance (January) |
| March 11th | — | Retail Sales (February) |
| 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 February 24th, 2011.
©2011 Raymond James Financial Services, Inc. member FINRA / SIPC.
