U.S. economic releases were softer than expected, but European releases were a bit better this week. Nonetheless, the equity markets rallied and the bond markets fell across the globe. Credit spreads narrowed, generating positive returns for the credit-sensitive sectors of the bond market for the week. The U.S. dollar fell; oil prices were mixed; and natural gas and metals commodity prices were higher on the week.

Perspective:

With mixed to softer economic releases, why were equity prices so strong across the globe? My guess is that events in Washington may have given the markets a boost. First, the lifting of the debt limit assured investors that partisan politics were not going to prevent the U.S. from paying its bills. Secondly, new Federal Reserve Chair Janet Yellen stood up well to six hours of testimony and questioning by Congress this week. She promised a continuation of Bernanke policies, which she had helped to formulate. She committed to continuation of tapering unless a "notable" change in outlook took place. In questioning she continued to champion the independence of the Federal Reserve, without the interference of CBO audits. This was of particular importance because the Fed may be required to do things that are necessary, but unpopular (like tighten monetary policy in the face of rising inflationary pressures); something that Congress has not been able to do. My own admiration for the new Fed chair was also increased this week while I visited my sister, who served under Yellen when she headed the San Francisco Fed. My sister had sent Yellen a box of chocolates in congratulations for her confirmation. With all the preparation for her new assignment, first FOMC meeting and chairmanship, Yellen took the time to write my sister a handwritten note. That was a class act and a sign of the personal skills that Yellen brings to her new role.

Economic Releases:

U.S. Industrial Production (blue in the chart) fell -0.3% in December; Capacity Utilization (red in the chart) fell to 78.5%; and both were below the range of expectations and show that the manufacturing sector has been losing traction over and above weather-related impacts.

The consumer slipped in January. Retail Sales (blue in the chart) fell -0.4%; ex-autos, Retail Sales (red in the chart) were flat. Both numbers were below consensus and follow downward revision for December.

Other Economic Releases

U.S. Initial Jobless Claims may have been muted by weather, but they were not an indication of strengthening of the job market. Initial Claims increased 8,000 to 339,000 while the four-week average of Claims increased by 3,000 to 336,750 the week of Feb. 8. Continuing Claims, which are reported on a one-week lag, fell by 18,000 to 2.953 million.

European Union Industrial Production fell -0.7% in December. The flash report of EU fourth-quarter GDP was +0.3%; Germany's flash GDP was +0.4%; France's GDP was +0.3%; all flash reports were a tick better than expected.

Consumer Prices in China rose 1.0% in January, just 2.5% year-over-year, but Producer Prices fell -0.1%, -1.6% YOY.

Equities Markets:

This was a second positive week for the American and European stock markets; the Nikkei was the only one in the table to post a negative return. Narrowing spreads generated positive returns for the Merrill Lynch credit market indices even though government yields rose on the week. Even after these positive weeks, over half of the indices below have yet to post a positive year-to-date return.

Bond Markets:

Government Bond market yields were higher in almost all markets, Japan's bonds being the exception. Credit spreads for corporate credit narrowed.

Currencies & Commodities:

The U.S. dollar fell against the other four currencies listed in the chart. Oil prices were mixed with an increase in WTI and decrease in Brent on the week. Natural Gas and metals prices rose on the week.

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