The S&P 500 has now risen for seven weeks in a row, including 1.71% last week. Stocks are up 10% since Nov. 30, and 23% since late August, when Fed officials began hinting about the quantitative easing (QE2) to come. On Friday, in fact, the S&P 400 Mid-Cap Index (AMEX: MID) hit an all-time high, and the Russell 2000 may be next to reach record territory. The Dow, S&P 500 and especially the Nasdaq are far from their highs, giving big-cap stocks plenty of room to catch up with their smaller brethren.
On Thursday, the U.S. Labor Department reported that the Producer Price Index (PPI) rose 1.1% in December — a 14% annual rate! Some PPI price components spiked especially high: Gasoline costs rose 6.4% in December while vegetable prices rose 22.8%, due mostly to freezing weather. By comparison, the Labor Department said December’s Consumer Price Index (CPI) rose less than the PPI, but it still hit a surprisingly sharp 0.6% (7.4% a year), the sixth straight monthly increase. Energy prices rose 4.6%.
Also last week, Brent crude oil reached $99 per barrel, while light sweet Nigerian crude (“Bonny Light”) surpassed $100 per barrel on Wednesday. However, the oil price we see in the daily news is that of West Texas Intermediate, closing at $91.54 — depressed by high inventory levels at the Cushing, Okla., storage facility — so investors have not been unduly alarmed by seeing $100 oil prices on CNBC yet.
Looking forward, the U.S. Department Agriculture (USDA) cut their forecasts for some key crops, which sent corn and soybean prices to their highest levels since the mid-2008 food panics after the Midwest U.S. floods. The USDA also said that corn inventories will fall by another 5.5% this year to their lowest level in 15 years, pushing food prices up more. (Corn is also used to make ethanol, so if more corn is used for food than gas, this will cause gas prices and animal feed – hence meat prices – to rise further in 2011.)
India reported on Friday, that its wholesale prices rose at an 8.43% annual rate in December, up from 7.48% in November. High grain prices have already caused food riots in Algeria and Mozambique. Inflation is also soaring in China. Last Friday, China’s central bank raised its bank reserve requirements for the fourth time in the last two months, signaling the fact that inflation fighting is Beijing’s No. 1 priority.
French President Nicolas Sarkozy is trying to make food price stability one of the major priorities at the upcoming G20 meeting. Specifically, Sarkozy wants to put pressure on the 20 biggest governments to combat the recent wild swings in commodity prices, which also cause wide swings in currency exchange rates. Sarkozy is also pressing for tougher regulation on commodity derivatives trading on world markets.
Interest Rates are Rising in Emerging Economies — But Not in Europe
Meanwhile, rising worldwide inflation is causing some central banks to raise interest rates to combat inflation. On Thursday, for instance, the Bank of Korea raised rates by 0.25% to 2.75%. But on the same day the Bank of England and the European Central Bank (ECB) left their key lending rates unchanged at their monthly meetings, even though inflation in the euro-zone is now at a 26-month high.
Last week’s bond sales went well in troubled Italy, Portugal and Spain, but the ECB will likely dodge any rate increases as long as the sovereign debt woes continue in so many euro-zone countries. Meanwhile, in the emerging market economies with strong economies (such as South Korea), rates can rise, giving their currencies an advantage over lower rates offered by the British pound, euro, Japanese yen and U.S. dollar.
Speaking of the U.S. dollar, Moody’s and Standard & Poor’s both expressed concern over the U.S. debt situation last week. Moody’s said that the U.S. would need to “reverse an upward trajectory in the debt ratios” to support its highest (AAA) debt rating. Moody’s senior analyst, Sarah Carlson, said “If there are not offsetting measures to reverse the deterioration in negative fundamentals in the United States, the likelihood of a negative outlook over the next two years will increase.” S&P analyst Carol Sirou (head of S&P France) said in Paris last Thursday that “We can’t rule out changing the outlook … No triple-A rating is forever.”
As if to underline those rising debt concerns, the U.S. Treasury reported last week that the budget deficit in first three months of fiscal-year 2011 (Oct. 1 to Dec. 31, 2010), was $370 billion — a $1.48 trillion annual rate versus $1.294 trillion in fiscal 2010. It looks like the federal government’s budget deficit is growing, even in an economic recovery, when it is supposed to shrink. This will put further downward pressure on the U.S. dollar and upward pressure on all commodities, as expressed in U.S. dollar terms.
The good news is that, due to high crop prices, the Commerce Department reported that the trade deficit narrowed for the fourth straight month in November to $38.3 billion, down from a revised $38.4 billion in October. This is the smallest trade deficit since January and significantly below economists’ expectations that the trade deficit would widen to $40.3 billion. November exports rose 0.8% to $159.6 billion, the highest level since August 2008, while imports rose 0.6% to $198 billion, due largely to higher oil prices.
Consumer Spending Rising … Along With Jobless Claims
Last week, we learned that the U.S. consumer is back with a vengeance, as demonstrated by the recent Christmas shopping season. Overall retail sales rose 6.6% in 2010 and the Wall Street Journal reported on page 1 of its weekend edition (Jan. 15-16) that total bank loans increased 6% in the last quarter and credit card balances rose for the first time in two years, saying, “Consumers were more willing to pull out their plastic. Credit card usage was up 10% year-over-year.” JPMorgan Chase & Co. (NYSE: JPM) alone issued 3.4 million new credit cards last quarter. Chase Chairman Jamie Dimon said “the consumer is getting stronger.” Due to paying down previous card balances, these consumers “make better borrowers,” according to Dimon.
On the negative side, the most disappointing news last week was released Thursday, when new jobless claims surged 35,000 in the latest week to 445,000, the highest level in more than two months. The Labor Department attributed the surge in new jobless claims to “administrative backlogs.” Specifically, Scott Gibbons, a Labor Department spokesman, said that the data can be particularly volatile in the first few weeks of January following the Christmas and New Year’s holidays. Gibbons said that many people don’t file claims right away and state unemployment offices are open fewer hours, leading to delays.
Gibbons also said that the second week of January typically registers the highest number of claims each year, adding that “I don’t think there all of a sudden is a bunch of additional layoffs.” Let’s hope he is correct. In the meantime, the number of people who continue to receive unemployment checks dropped 248,000 to an adjusted 3.88 million in the week of January 1, a sign that the job market is improving.
Overall, it appears that the U.S. economy’s momentum remains strong as the trade deficit improves and a weak U.S. dollar continues to boost exports. This is great news for U.S. and worldwide economic growth.
