The Economy

January 31st, 2012 Last week the number of POSITIVE developments exceeded NEGATIVE
developments -barely. 
Below is a succinct list of last week’s events:
Positives:
1) Italian and Spanish bond yields continue lower, 10 yr in Italy below 6%, Spain’s below 5% 2) German IFO business confidence rises to 8 month high 3) German consumer confidence at best since April 4) Euro zone mfr’g and services composite index unexpectedly moves back above 50, led by Germany 5) US Durable Goods orders in Dec surprise to upside but how much was pulled forward from 2012 due to 12/31 expiration of full depreciation expensing? 6) Jan UoM confidence rises to best since Feb ’11 7) Richmond and KC mfr’g survey’s both rise 8) Bank of Thailand cuts rates. 9) Reserve Bank of India cuts reserve requirements
Negatives:
1)Portuguese yields spike, 5 yr CDS up 150 bps on week to new high 2) Spanish unemployment for Q4 rises to 22.9% 3) Italian consumer confidence holds at lowest since at least ’96 when survey began 4) Q4 US GDP rises 2.8%, a touch below expectations but nominal GDP gains just 3.2%, the weakest since Q3 ’09. If deflator was in line with expectations, Real GDP would have been up just 1.3%. Real final sales up just .8% vs 3.2% in Q3 5) Initial Jobless Claims normalize at 377k after holiday distorted 356k last week 6) Inflation expectations within UoM rise to 3.3%, the most since Sept and remains above the 20 yr avg of 3.0%. Expectations also rise to multi month highs in TIPS market 7) New Home Sales remain anemic, prices fall 12.8% y/o/y 8) FOMC stretches out zero rates until late 2014, US$ resumes downward trend against everything. Fed destroying the price mechanism as if interest rates are artificially priced, what are assets really worth? If we don’t know what assets are really worth, how can capital be efficiently allocated? And, if Zero Interest Rate Policy was effective, Japan’s economy would have boomed over the past 10 yrs.

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