Stock prices were modestly lower, while Treasury bonds took a bigger hit as the data flow continues to come in on the side of faster economic growth. Thursday’s data was almost universally stronger, although the strengthening is as much a testament to how anemic conditions were previously as to the vigor of the current recovery. In the U.S., today brought lower-than-expected initial jobless claims in the second week of January, which may have been distorted by winter storms; a robust 1% increase in the leading economic indicators in December, all of the excess over expectations coming from a pickup in building permits (go figure); the Philly Fed’s Business Outlook Survey stayed relatively strong, although its future activity gauge pulled back in January from December’s seven-year high; existing single-family home sales increased 12% in December to a level higher than in any month not affected by home buyer tax credits back to the summer of 2007. While this last result comes with the caveat that 36% of December’s sales were distressed sales, it represents a glimmer of hope for housing nonetheless. The 3 million unit inventory of unsold existing single-family homes at year-end 2010 was the equivalent of 8 months of sales, lowest backlog since last May but still somewhat higher than normal.
Thursday’s other nominally positive data report that markets looked askance at was China’s report that fourth-quarter GDP was 9.8% higher than the Q4 2009 level of economic output. For the full year 2010, China’s GDP increased 10.3%, with the year-on-year growth rate slightly lower in the second half (9.7%) than that estimated for the first half (10.9%). Global investors were not pleased – not because of the second-half diminution of growth, but because of the slight acceleration from Q3 to Q4; the thinking is that Chinese policy makers will not be satisfied with the minor extent of cooling off and that the People’s Bank of China will be raising interest rates to effect a more pronounced slowing in order to beat down inflation pressures. While there may be some basis for such concerns, our view is that China’s top priority is to keep generating jobs for the 10 million or so new entries into the job market each year. December saw a modest pullback in the rate of consumer price inflation due to some easing of food prices.
U.S. Treasury bond prices were broadly lower Thursday as investors were troubled by fears of higher Chinese interest rates and by the mediocre reception given the Treasury’s auction of $13 billion in new 10-year TIPS. The 10-year T-note lost almost a point in price today, pushing its yield to 3.46%, near the high end of its month-long trading range of 3.30%-3.50%. We are not convinced that the direction of yields is strictly onward and upward over the next several months, and we wouldn’t be surprised to see some rebound in bond prices here, although for the year we do expect modestly lower prices and higher yields.
INVESTMENT OUTLOOK…The respectable year-end rally in stocks, fashioned out of improvement in leading economic indicators, has continued early in 2011. At some point, the U.S. economy will have to do without the trillion dollar stimulus packages – past and prospective – that have been contributing to the quickening seen lately in economic activity. In the end, strong corporate earnings can overcome a lot of this market’s shortcomings, and we judge the profits outlook for 2011 to be good. Stock market volatility has receded from the awful levels of 2008-09, but we would not be surprised if there are occasional bouts of volatility popping up through 2011, although so long as earnings prospects remain favorable the general trend of stock prices figures to be up.
Copyright © 2011 by Wright Investors’ Service, Inc.