Market Watch: US and European Economies
Investors continue to follow the markets with eyes wide open. One eye is focused on Europe, where leaders of the European Union try and cobble together a comprehensive plan to contain rising sovereign debt costs in its weaker economies, deal with a restructuring of Greek debt and fortify the banking system.
European leaders continued their marathon discussions this week, but little in the way of formal announcements emerged. Speculation is building regarding the size of the haircut needed to be taken by the bondholders of Greek government debt (60%), the amount of cash needed to bolster various financial rescue facilities ($1-2 trillion Euro),and steps taken to increase capital in the European banking system. This process is incredibly complicated, and we expect it may take months to come to full agreement.
This week’s economic indicators supported our thesis of a slow-growing U.S. economy with inflation on the rise. September industrial production was up 0.2%, in line with consensus. Housing starts of 658,000 for September, while higher than expected, remain at a very low level. The index of leading indicators for September were 0.2%, the fifth consecutive month of increase, signaling expected growth in the economy for the next few quarters. The Consumer Price Index for Urban Consumers increased in September, and is up 3.9% on a year-over-year basis, the highest rate of inflation we have experienced in three years. While inflation as measured by the CPI could slow some in the next few months, we remain watchful for a rise over the long-term, given the unprecedented expansion of currency in the U.S. and elsewhere in the world.
The S&P 500 index gained 1.14% on the week to close at 1,238.25, its highest close since early August. Treasury bonds were mixed, with the 10-year closing the week at a 2.22% yield, down 0.03% in yield from last week. Gold closed at $1642.38/oz., down 2.28% from last week.
Corporate earnings season is starting, with the early results once again on the positive side. Notable upside surprises this week were reported by Citigroup,Bank of America, Southwest Airlines, American Express and Intel. This was partially offset by misses from Goldman Sachs and Wynn Resorts. Next week’s notable releases should include Amazon.com, Lockheed Martin, Exxon Mobil, Merck, and Visa.
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