Calvert CIO Week in Review December 2, 2011-TEST HTML
Fixed Income Outlook
In what seems to be the first real step towards addressing the European financial crisis, Germany’s chancellor, Angela Merkel, announced that she is determined to create a fiscal union that would be legally enforceable. She is striking at the need for structural changes to deal with the debt crisis over the long term rather than focusing solely on short-term liquidity fixes. She and French President Sarkozy back modifications to the European Union treaty which would deepen fiscal integration. Separately, a more immediate “fix” to the crisis is a new European plan which proposes channeling central bank loans through the International Monetary Fund (IMF) to provide as much as $270 billion. On Friday afternoon, the IMF said it would need more resources if conditions in Europe worsened.Â Treasuries rallied on this and rumors of a Spanish ratings downgrade after having sold off for much of the week.
U.S. unemployment data released Friday showed a significant drop in the unemployment rate to 8.6% from 9.0%, helped in part by the unfortunate departure of Americans from the labor force. The decrease in the unemployment rate reflected a gain in new jobs of 278,000 while a larger 315,000 left the labor force. Payrolls climbed 120,000 but with most of that coming from retailers and temporary help agencies. Treasuries initially sold off on the data but came back as the initial jobs euphoria was tempered.
On a more positive front, consumer confidence rose more than expected in November, up to 56.0 from a revised 40.9 reading in October. Improved sentiment could help sustain consumer spending through the holiday season. Also, the Chicago Purchasing Manager index, a gauge of business sentiment, rose to 62.6 from 58.4 on stronger orders and production in November.Â
Investment-grade corporate spreads narrowed slightly on the week with the Barclays Capital U.S. Credit Index average option-adjusted spread (OAS) narrowing from 231 basis points to 224 basis points week over week. Spreads for the broad Barclays Capital U.S. High Yield Index moved lower by about 30 basis points to 756 basis points. Credit swap spreads dropped on the improved consumer confidence and unemployment data as investors lightened up on their hedges against future corporate losses.
By mid-day Friday, Treasuries over the week were unchanged in two-year yields and slightly weaker at the long end with the 30-year Treasury yield up 10 basis points to 3.04%.
Treasury Yield Curve
Key Market Indicators
|Fed Funds Target Rate||0%-0.25%||Unchanged|
|Ten-year Treasury Bond Yield||2.00%||+2 basis points|
|U.S.$ vs. Euro||€0.7603||+€0.0021|
|U.S.$ vs. Yen||¥79.51||+¥1.85|
|Unemployment||8.3 % January||8.5% December|
|Consumer Price Index||227.51||+2.9%|
Source: Calvert Investment Management, Inc.
For the week, the Standard & Poorâ€™s 500, Russell 1000, Russell 2000, MSCI EAFE, and MSCI Emerging Markets Indices returned 7.46%, 7.51%, 10.36%, 9.09%, and 9.53%, respectively.
The three top-performing sectors in the Russell 1000 were Energy, Financials, and Materials while the more defensive Utilities, Consumer Staples, and Health Care sectors lagged.
The potential collapse of the eurozone is still very much at the center of investor worries. The regionâ€™s economic picture is looking increasingly grim with peripheral economies firmly in a recessionary spiral and the entire union likely in a recession already. The eurozoneâ€™s move toward increased fiscal integration and fiscal austerity measures will likely create a fiscal drag and not help the E.U. economy in the near term, although resulting structural changes should be good in the long run. Tighter fiscal integration, if achieved, will open the door for more active involvement by the ECB, which should be extremely helpful for market sentiment.
During the week, the U.S. Fed, the ECB, and the central banks of Canada, Switzerland, Japan, and the U.K. made a coordinated move to cut the premium on overnight dollar borrowing from OIS plus 100 basis points to OIS plus 50 basis points, making it cheaper for global banks to borrow dollars. The move sent equity markets on their largest jump since March 2009. In particular, financial stocks across the globe saw a significant bounce as a result. â€¢ France and Spain successfully auctioned sovereign debt (the Spanish auction was oversubscribed while the French auction saw yields improved from November). This weekâ€™s auction came on the heels of a poor German auction the prior week. Italy also had a successful auction this week, but at the expense of yields north of 7%.
China unexpectedly cut reserve rates for its banks on the heels of lower inflation numbers and lower-than-expected PMI data, which suggests the possibility of a hard landing for the Chinese economy. Both Chinaâ€™s and Indiaâ€™s GDP growth numbers are decelerating with the risks of hard landings increasing.
Despite the European crisis, the U.S. economy continues to proceed on the path of gradual recovery. Vehicle sales andproduction both look encouraging. The falling unemployment rate is boosting consumer confidence, which showed a muchbetter- than-expected reading this week. Most data now point to a likely higher-than-expected U.S. GDP this quarter.
Improving consumer confidence has translated into solid Black Friday sales. Improvement in the household employment and temporary employment numbers was a welcome positive sign, while the impressive decline in the unemployment rate from 9% to 8.6% was, unfortunately, primarily due to a drop in the labor force participation rate.
Despite credit rating cuts for several of the U.S. largest banks (Bank of America, Goldman Sachs, Morgan Stanley, and Citigroup had their long-term credit ratings cut from A to Aby S&P while JPMorgan Chase was reduced from A+ to A), the group had an impressive bounce during the week.
While the U.S. economy seems to be doing well, the U.S. policy stalemate is still firmly in place. The U.S. Senate voted against the extension of the payroll tax breaks which, if not extended into next year, will likely be a drag on the economy.
The Week Ahead
- Monday, February 20: Presidents' Day holiday
- Tuesday, February 21: Chicago Fed National Activity Index data reported
- Wednesday, February 22: Existing home sales data reported
- Thursday, February 23: Kansas City Fed Manufacturing Index data reported
- Friday, February 24: University of Michigan consumer confidence, new home sales data released.
This commentary represents the opinions of its authors as of 2/17/12 and may change based on market and other conditions. Their opinions are not intended to forecast future events, guarantee future results, or serve as investment advice.
Accounts managed by Calvert Investment Management, Inc. may or may not invest in, and Calvert is not recommending any action on, any companies listed. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Calvert Investment Management, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information.
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