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January 2010

In January, short-term bond yields were little changed as the Fed reaffirmed its commitment to a very low level of interest rates. The Fed remains on track to end its quantitative easing program by the end of March and this removal of stimulus is really the first tightening step from the Fed. Interest rates remain at 0-25 basis points. In January, yields on twelve-month agency discount notes fell 9 basis points to 0.36 percent. Yields on the 3-month Treasury bill rose 2 basis points to 7 basis points.

The Conference Board’s Leading Index continues a rapid ascent, rising 1.1 percent in December and 7.7 percent on a year over year basis. Industrial activity has been rebounding sharply both domestically and abroad. In January the ISM Manufacturing Index rose to a strong 55.9, its highest level since 2005. Industrial production and capacity utilization also indicated robust activity levels. At this point in the economic cycle the focus should be on leading indicators such as the Conference Board’s Leading Index, the ISM Manufacturing Index and industrial production, all of which have rebounded sharply. Too often investors focus on lagging indicators such as employment and bank lending which will likely continue to worsen even as the economy is improving.

With that said, December’s employment report disappointed as unemployment remained at 10 percent, as nonfarm payrolls fell 85,000 versus expectations of no change. The poor employment situation is also likely negatively impacting consumer confidence and retail sales.

Past performance does not guarantee future results.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.  The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.  The Conference Board index of leading economic indicators is an index published monthly by the Conference Board used to predict the direction of the economy's movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy.

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