Dec 12, 201102:50 PMBlog: Alaska's Eye on Wall Street
Week in Review, Dec. 12, 2011
U.S. stocks managed a +0.9% gain last week as the S&P 500 settled in at 1,255. YTD it is up +1.8%. The yield on 10 year Treasuries rose slightly to 2.06%.
European stocks lost ground earlier in the week but rallied later on positive news from the EU summit on Friday (it's the 15th summit in 23 months). The Stoxx 50 was flat for the week.
EU leaders (except for Great Britain which opted out) agreed to a new deal on economic governance including :
Limit budget deficits to 3% of GDP and debt to 60% of GDP with various automatic enforcement mechanisms if these country guidelines are violated. (This sounds a lot like the Maastricht deal negotiated in 1992, but I guess this time they mean it!)
Submit country budgets to the European Commission which may demand changes if that country is breaking the rules. (I wonder what "the people" think about this loss of sovereignty.)
Sped up the permanency of the $665 billion EFSF, added $267 billion lending power through the IMF, and suggested that maybe bondholders would not share in the losses on sovereign debt.
Details to follow! They'll meet again in March.
However, hopes of a co-ordinated EU/ECB deal to stem the sovereign debt crisis were dashed when the ECB cut rates on Thursday but declined to make further commitments. Perhaps that is in the future. For now the ECB is providing lots of long term liquidly to the banks but is reluctant to buy and monetize the debt of struggling member countries. Unlike the Fed's dual mandate (keep inflation and unemployment low), the ECB has only one directive - inflation.
S&P, which placed the credit ratings of all 17 euro zone nations on a watch list for downgrade last week, said it was reviewing matters in light of action by EU leaders.
Meanwhile back at home, a deal to fund the government past December 16, when the current stopgap funding measures expire, remains elusive. The Democrats want last year's payroll tax cuts and unemployment benefits extended one more year. The Republicans will do that, but have attached approval of the Keystone pipeline as part of the deal.
Data out last week included a weaker ISM service sector report but consumer confidence that was better than expected. Thursday's jobless claims fell to their lowest level in 9 months reinforcing the idea that the economy is improving.
This week there is slew of data including retail sales (expected +0.6%), PPI (+0.2%), CPI (+0.1%), and industrial production (+0.2%). The Federal Reserve meets Tuesday but we expect no major announcements.
I'm off on vacation so you will be in Nick's capable hands for a few weeks. Happy Holidays!
Jeff Pantages, CFA
Chief Investment Officer
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