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Weekly Market Intelligence

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As we head into the week, investors can take comfort from a number of economic releases that paint a picture of a recovering global economy in the developing world.  This recent data continues to support one of our central investment themes for 2011: overweight equities vs. bonds and developed markets vs. emerging markets.

Starting in Europe – last week witnessed the release of a number of economic statistics, the vast majority of which were better than expected, including manufacturing surveys in France, Germany, and the UK. In particular, we continue to see strength in the German economy where the IFO Business Climate Index recently climbed to 110, eclipsing the 2006 high.

Even in Japan there are signs of stabilization. Last month Industrial Production rose by 3.1% month over month – best reading in 11 months.

In the United States we had two very strong numbers from the ISM Institute.  The Manufacturing Survey hit its highest level since 2004 while the Services component reached its best level since 2006.

Finally, while Friday’s US Non-Farm Payroll print was much weaker than expected, it is worth remembering that the number was likely distorted by the fact that January witnessed a number of brutal winter storms in the Northeast that dumped over 3 feet of snow in the region. Taking a longer term perspective on the US labor market, it is an anemic recovery but conditions are slowly improving. Non-Farm Payrolls are up ¾ of a percent year-over-year, and while still uninspiring this is the fastest pace of job growth since December 2007.

Now, the good news in the economy was decidedly bad news for US Treasuries which continue to trade lower. The yield on the 10 year Treasury closed last week at 3.65%, its highest level since last spring.  US long term yields are still low on an inflation-adjusted basis, and government deficits guarantee a steady supply of new bonds throughout the year. While I don’t see a ‘94 style bond market meltdown over the next 6-12 months, I do think rates will continue to grind higher.

The bottom line: at least from an economic perspective the world is becoming a bit less scary. Cyclical conditions in most developed markets are improving. The risk of a double dip is receding, and most developed market central banks are unlikely to tighten soon.  All in all, an environment that should favor global equities over bonds and in particular segments of the equity market that benefit from an improving economy, such as value, technology, industrials, and energy.  The one asset class that is unambiguously pressured by improving conditions is likely to be US Treasuries.


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