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January 20, 2014
"The deep freeze is behind, and the horizon is brighter"
The week in review...
US: June in January Signs of growth abounded. Dec 2013 consumer and producer prices (CPI and PPI) for the month, up 0.3% and 0.4% respectively (0.1% and 0.3% ex food and energy); initial jobless claims for the week ended Jan 11 2014 dropped 2k to 326k, better than expected; retail sales rose 0.2% in Dec, beating expectations, with sales ex autos up 0.7%, the largest increase in almost a year. The improvement was evident in the government's monthly income statement: the US ran a budget surplus in Dec, with revenue exceeding spending by $53.2 bn, compared to a $1.19 bn deficit in Dec 2012 – benefitting from higher payroll taxes, payments from Fannie Mae and Freddie Mac and a declining unemployment rate. Manufacturing production rose 0.4% in Dec, beating expectations; though housing starts fell in Dec vs. Nov. many blamed the weather; job openings for Nov were stable at about 4 mn; for calendar 2013, net employment rose 2.0 mn.
Brazil: Lesser of two evils? With inflation for 2013 running near 6% (and rising) while GDP growth is just over 2% (and likely slowing), the central bank raised its benchmark interest rate to 10.5% from 10%, the sixth straight monthly half-point increase. The hike would seem to suggest the bankers fear inflation more than recession – with good reason, given the destructive hyperinflation of the late 1980s and early-mid 1990s.
China: Credit slowing, maybe The central bank reported that new credit fell by 10.7% to 7.135 tn yuan (about $1.18 tn) compared to the year-ago period. The slowdown reflected the impact of higher interest rates, among other factors. But despite the slowdown, overall new credit was still up 9.7% to 17.29 tn yuan for the full year. .So-called "shadow banking" (lending by trust companies, securities firms, insurance companies and other informal lenders) rose 43% in calendar 2013 vs 2012, to 5.165 tn yuan. Drastic mid-year moves by the central bank may have worked; informal lending doubled in 1H2013 vs 2012, but grew only about 5% in 2H2013 vs the year-ago period. The challenge: restraining the growth of unregulated credit without crippling the overall economy.
Japan: More than meets the eye Orders for new machinery by businesses surged to a five-year high in Nov, up 9.3% year-on-year (Y/y) to ¥882.6bn ($8.46 bn), the second increase in a row and the fifth biggest on record. Though this figure is sometimes volatile, the jump could be an early sign that government stimulus policies are taking hold. But there's another possibility: orders could have risen in an attempt to avoid an impending hike in the national sales tax.
Spain: The gain is plain The most recent auction of three-year government notes, maturing in April 2017, resulted in an average yield of 1.595 percent, the lowest three-year auction rate since a leading data vendor started compiling data in 2004. The auction, which included other issues, raised €5.91 bn ($8.05 bn), the largest amount for an auction of bonds in a single day since Jan 2012. Spain's ten-year yield is at levels last seen in 2006, before the eurozone crisis began.
Sources: Bloomberg, Reuters, Wall Street Journal, Financial Times, New York Times, China Daily, MNI.
Signs of the times:
Hollande Faces Investors Deserting French Debt - Bloomberg
Europe Car Sales Surge Most in Four Years on Lower Prices - Bloomberg
Indonesia Bans Ore Exports in Push for Metal Smelting - Bloomberg
Senate Sends Obama a Bill to Fund the Government until October - Washington Post
...the week ahead:
GLOBAL ECONOMIC CALENDAR: January 19 – January 25
Europe, UK, Africa, Mideast
Asia Ex Japan & Pac Rim
Colombia: industrial production
China: GDP, industrial production, capacity utilization, fixed asset investment, retail sales
South Korea: producer prices
Germany: producer prices
Italy: industrial sales & new orders
Spain: trade balance, industrial orders, house prices
Hong Kong: unemployment rate
New Zealand: consumer prices
Canada: manufacturing sales & wholesale sales
Germany: ZEW economic conditions & sentiment
Switzerland: ZEW expectations
UK: industrial trends orders
Japan: interest rate decision
Hong Kong: consumer prices
India: wholesale prices
Australia: consumer prices
Mortgage applications, weekly retail sales
Canada: interest rate decision
UK: unemployment rate, average earnings, claimant count change, public sector net borrowing, Bank of England minutes
South Africa: consumer prices
China: non-government manufacturing sector survey
Thailand: interest rate decision
Initial jobless claims, leading indicators, existing home sales, FHFA home prices, Chicago Fed national activity, Fed balance sheet, money supply
Canada: retail sales
Eurozone: manufacturing & services sector surveys
Germany: manufacturing & services sector surveys
France: business survey, manufacturing & services sector surveys
Spain: unemployment rate, producer prices
Russia: industrial production
UK: distributive trades survey
Taiwan: domestic trade, industrial production
Canada: consumer prices
Mexico: retail & wholesale trade
Brazil: consumer confidence
Argentina: industrial production
Italy: retail sales
Singapore: industrial production
The Consumer and Producer Price Indexes (CPI and PPI) measure the average change in U.S. consumer and producer prices over time in a fixed market basket of goods and services determined by the U.S. Bureau of Labor Statistics.
The Federal Home Loan Mortgage Corp (FHLMC), also known as Freddie Mac is government-sponsored enterprise chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans. The FHLMC purchases, guarantees and securitizes mortgages to form mortgage-backed securities.
The Federal National Mortgage Association (FNMA), also known as Fannie Mae, is a government-sponsored enterprise founded in 1938. Its purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities allowing lenders to reinvest their assets into more lending.
The Federal Housing Finance Agency (FHFA) is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the 12 Federal Home Loan Banks.
Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.
The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
The Centre for European Economic Research (ZEW) is a public-private institute associated with the University of Mannheim, Germany.
The opinions and views expressed herein, as well as references to individual companies or securities, are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or recommendations to buy, hold or sell, or investment advice.
Past performance is not a guarantee of future results.
All investments involve risk, including possible loss of principal.
Yields represent past performance and there is no guarantee they will continue to be paid.
Foreign securities are subject to the additional risks of fluctuations in foreign exchange rates, changes in political and economic conditions, foreign taxation, and differences in auditing and financial standards. These risks are magnified in the case of investments in emerging markets.
Fixed income securities are subject to interest rate and credit risk, which is a possibility that the issuer of a security will be unable to make interest payments and repay the principal on its debt. As interest rates rise, the price of fixed income securities falls.
Mortgage-backed securities involve additional risk over more traditional fixed-income investments, including: interest rate risk, implied call and extension risks; and the possibility of premature return of principal due to mortgage prepayment, which can reduce expected yield and lead to price volatility.
Commodities contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
This material is for information only and does not constitute an invitation to the public to invest in any funds, securities, strategies or other products. You should be aware that the investment opportunities described should normally be regarded as longer term investments and they may not be suitable for everyone. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Past performance is no guide to future returns and may not be repeated. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Please note that an investor cannot invest directly in an index. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice. The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
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