A JOBS REPORT MUCH LIKE THE LAST ONE
Unemployment fell dramatically in January: the Labor Department reported a second straight .4% monthly drop, resulting in the largest two-month reduction of the jobless rate since 1958. While the decrease puts unemployment at 9.0% (the lowest figure since April 2009), just 36,000 net new jobs were created. The implication: due to the weather or discouragement, many job seekers didn’t look for work. “The thumbprints of the weather were all over this report,” Bank of America Merrill Lynch economist Neil Dutta told the Associated Press. “We know the job market is recovering.”^1,2

CONSUMER SPENDING IMPROVES 0.7% IN DECEMBER
This beat the 0.5% gain forecast by economists polled by Reuters – and it was the sixth straight positive month for the indicator. The Commerce Department also noted that personal wages increased 0.4% in December. The core Personal Consumption Expenditures price index (PCE) was flat for the month; in 2010, core PCE only increased 0.7%.³

ISM: MANUFACTURING, SERVICE SECTOR GROW 2.3%
The Institute for Supply Management’s manufacturing and service sector indices both jumped 2.3% in January. (It was the best month for the non-manufacturing index since August 2005.) The manufacturing index is now at 60.8, and the service sector index is at 59.4. Additionally, the Commerce Department said that December brought a 0.2% improvement in factory orders.^4,5,6

STOCKS LEAP NORTH, EVEN WITH UNCERTAINTY
The market largely turned its attention away from Egypt toward 4Q results and domestic economic indicators last week. The weekly gains were the best since early December: DJIA, +2.27% to 12,092.15; S&P 500, +2.71% to 1,310.87; NASDAQ, +3.07% to 2,769.30. As for fear in the marketplace, one measure of it – the CBOE VIX – dropped 20.66% for the week. Gold ended the week at $1,348.30 an ounce and NYMEX crude at $89.03 per barrel, and copper prices hit an all-time peak Friday.⁷

THIS WEEK: Monday brings 4Q results from Humana and Hasbro; also, President Obama addresses the U.S. Chamber of Commerce. Tuesday brings earnings from UBS and Toyota. Wednesday, we have earnings reports from Cisco, MetLife, Nissan, Prudential and Coca-Cola plus Ben Bernanke testifying before Congress. Thursday we get weekly unemployment figures and 4Q earnings from PepsiCo, Philip Morris and Sprint; it will also be “opening day” for Verizon iPhone sales. Friday offers the initial January consumer sentiment survey from the University of Michigan.

THE MONTH IN BRIEF

DOMESTIC ECONOMIC HEALTH
The big news to come our way in January was the big leap in consumer spending for December. We had the sense late in 2010 that consumers were readily opening their wallets and billfolds; the Commerce Department’s report of the 0.7% monthly gain in the category confirmed it. The Commerce Department also announced that consumer spending rose a very healthy 4.4% in the fourth quarter of 2010.²

January also brought a 0.4% drop in the jobless rate, but the news wasn’t as good as it seemed. Unemployment did fall to 9.4% for December as 453,000 people stopped receiving federal benefits, but only 103,000 people found new non-farm jobs. So the drop in the unemployment rate largely reflected job seekers giving up the hunt. Perhaps this was one of the reasons that the two major consumer confidence polls came to a split decision last month: the University of Michigan’s poll declined by 0.3 points in January, while the Conference Board’s poll reached an 8-month peak of 60.6.^3,4,5

The Institute for Supply Management’s closely watched purchasing managers indexes showed further growth. The December service sector index rose 2.1% to 57.1; the January manufacturing index, which came out at the start of February, rose 2.3% to a mark of 60.8. A 0.6% December gain in retail sales corresponded with the jump in personal spending.^6,7,8

Inflation picked up in December. The Consumer Price Index rose 0.5%, the biggest advance in 18 months – but core CPI advanced only 0.1%. The federal government’s Producer Price Index rose 1.1% for December with a 0.2% core PPI gain. Energy prices spurred much of the advances in both indexes. While overall durable goods orders fell 2.5% for December, they were actually up 0.5% with aircraft orders factored out.^9,10,11

GLOBAL ECONOMIC HEALTH
At January’s end, the European Financial Stability Facility (the rescue fund set up by the European Union last year) appeared to be shifting focus. The EU was said to be near an agreement by which the EFSF would buy bonds directly from fiscally troubled nations rather than offer bailout loans. At the end of January, the European Central Bank actually took a break from buying bonds from Greece, Ireland and Portugal. The ECB had already bought €76.5 billion of those bonds from May 2010 through January, and the EFSF is scheduled to be dismantled in 2013. EU Economic and Monetary Commissioner Olli Rehn commented that when it came to the sovereign debt crisis, “the worst could be over.” In other positive news, Germany’s jobless rate diminished to an 18-year low last month and the Markit Economics PMI hit a 9-month peak.^12,13

Many Asian economies were celebrating rapid growth, while also contending with the rising prices that came with it. In January, South Korea noted a 46% year-over-year increase in exports, but its consumer price index posted a year-over-year gain of 4.1% (the year-over-year gain had been 3.5% in December). Indonesia was facing 7% inflation. A hint of cooling came from China, where the China Federation of Logistics and Purchasing index fell to 52.9 from 53.9 a month earlier. Japan actually had its credit rating downgraded by Standard & Poor’s.¹⁴

WORLD MARKETS
Call it a relief rally, call it renewed optimism: many European indices did well last month, even those in fiscally troubled countries. The German DAX rose 2.2% and the French CAC 40 advanced 5.4%. The Dow Jones Stoxx 600 was up 1.5% last month, putting it up 7.0% across December and January. Spain’s Ibex rebounded 10.0% in January while the benchmark indices of Greece and Italy respectively rose 12.7% and 9.4% for the month. Notable January losers included the FTSE 100 in Great Britain (-0.6%) and the Sensex in India, which suffered a correction (-10.6%) thanks to pessimism over renewed inflation and rising interest rates. At the end of the month, it had fallen 12.4% from November highs. The MSCI World Index rose 2.19% last month while the MSCI Emerging Markets index fell 2.81% (measuring performance in U.S. dollar terms).^15,16,17,18

COMMODITIES MARKETS
Gold did poorly, oil did decently, and tin and cotton did amazingly well. Gold futures fell 6.1% last month, the first monthly loss for the precious metal since July 2010. In fact, it was gold’s poorest month since December 2009 and its poorest January since 1997. Silver also took a hit as investors turned back toward stocks and funds – it fell 8.9% last month. However, palladium was up 2.1% in January (for a 7-month winning streak) and platinum prices rose 1.3%. Tin prices rose 10.2% on the month, and copper pushed toward an all-time.^19,20,21

Elsewhere, crude oil pulled off a 0.9% gain to get to $92.19 per barrel at the close on January 31. Cotton soared 16.0% and wheat prices gained 5.9% in January. The U.S. Dollar Index lost 1.5% for the month.^19,22,23

REAL ESTATE
New and existing home sales continued rebounding. Residential resales were up 12.3% for December, according to the National Association of Realtors. While the median sale price fell 1.0%, the excess inventory was also reduced to 8.1 months of supply compared to 9.5 months in December. The NAR also said pending home sales were up 2.0% in December – not quite the 4.5% gain analysts had expected, but still nice. As for new home sales, the Census Bureau noted that they jumped 17.5% in December. (Sales of new and existing homes were still respectively down 7.6% and 4.2% from a year ago.)^24,25

Back on December 30, Freddie Mac found average interest rates on 30-year FRMs at 4.86%, 15-year FRMs at 4.20%, 5-year ARMs at 3.77%, and 1-year ARMs at 3.26%. By January 27, those rates had declined or held steady as follows: 30-year FRMs, 4.80%; 15-year FRMs, 4.09%; 5-year ARMs; 3.70%; 1-year ARMs, 3.26%.^26,27

LOOKING BACK…LOOKING FORWARD
The S&P 500 recorded its first positive January since 2007 and its best January percentage climb since 2006. The DJIA had its best January in 14 years. At the end of the month, this was how things looked.¹

.

While Wall Street kept a close eye on the situation in Egypt at the end of January and the start of February, it wound up paying more attention to domestic economic indicators and earnings reports – the DJIA suffered only one triple-digit hit from the crisis. If stocks can suddenly navigate around a major geopolitical event with such ease, will that bode well for the rest of the year? While past performance is no barometer of future success, the historical data is encouraging: when the S&P 500 has posted a January gain, it has registered a yearly gain 81% of the time since 1928 (with an average yearly advance of 12.91%). The mood was more bullish than bearish at the beginning of February, with the Dow topping 12,000, the NASDAQ over 2,700 and the S&P 500 over 1,300.³¹

UPCOMING ECONOMIC RELEASES: Across the balance of February, we will get reports and releases concerning the January unemployment rate (2/4), December wholesale inventories (2/10), the first University of Michigan February assessment of consumer sentiment (2/11), January retail sales and December business inventories (2/15), January’s PPI, industrial output and housing starts (2/16), January’s CPI and Conference Board LEI (2/17), December’s Case-Shiller home price index plus the Conference Board’s look at consumer confidence in January (2/22), January existing home sales (2/23), January new home sales and durable goods orders (2/24), a final look at consumer sentiment in February from the University of Michigan (2/25), and January consumer spending and pending home sales (2/28).

.

“Knowledge is more than equivalent to force.”

– Samuel Johnson

CONSUMER & PRODUCER PRICES RISE
The U.S. inflation rate hit an 18-month peak in December: the federal government’s Consumer Price Index advanced 0.5%. Pump prices were a big factor in that gain: gasoline grew 8.5% more expensive last month. However, core CPI (minus food and energy prices) only rose 0.1% for the month, and consumers experienced just 1.5% inflation across 2010. The Producer Price Index went 1.1% higher in December, and energy costs were responsible for most of the gain. Core PPI (again, minus food and energy prices) was just +0.2% for December. Wholesale prices rose 4.0% in 2010.^1,2,3

ENCOURAGING RETAIL SALES FIGURES RELEASED
The Commerce Department announced a 0.6% gain in retail sales for December. While this was smaller than the 0.8% advance forecast by economists polled by MarketWatch, the increase wrapped up a positive year for the indicator. Retail sales have now improved for sixth months in a row, and 2010 was the best year for the category since 1999.⁴

GOLD SLIDES, BUT OIL RECOVERS
Gold is certainly off to a rocky start in 2011: as of Friday’s COMEX close, it was down 4.27% YTD to $1360.40 per ounce following news that China had tightened bank reserves. Oil, on the other hand, gained 3.99% last week to settle Friday at $91.54 a barrel on the NYMEX with prices up +0.18% YTD.⁵

NEWEST UMICH POLL UNDERWHELMS
The initial Reuters/University of Michigan consumer sentiment survey for January showed a little slip in consumer sentiment. It came in at 72.7, down from 74.4 at the end of 2010. Economists polled by Bloomberg News had reached a consensus forecast of 75.5.⁶

TWO WINNING WEEKS IN A ROW TO START 2011
A strong Friday contributed to nice weekly advances for the three major U.S. indices. The weekly numbers: DJIA, +0.96% to 11,787.38; NASDAQ, +1.93% to 2755.30; S&P 500, +1.71% to 1293.24. At Friday’s close, the S&P was at its highest level since August 28, 2008.⁷

THIS WEEK: Stock markets are closed Monday for the national holiday honoring Dr. Martin Luther King, Jr. Looking at the notable economic releases next week, we get data on December housing starts and building permits on Wednesday, and a look at December existing home sales, the latest index of leading indicators from the Conference Board and the latest initial and continuing claims reports on Thursday.

Last week’s riddle:

Complete these words by putting the same three letters into each one: F—RISH, C—DY, S—GH.

Last week’s answer:

The missing letters are LOU, and the words are FLOURISH, CLOUDY and SLOUGH.

This Week’s Riddle (Put your answer in the comments section below):

An interesting occurrence happened about 25 minutes before 1:00pm on May 6, 1978, and it involved numbers on the clock and months and years on the calendar. What was this numerically interesting moment?

.