Perspectives from Above the Noise – Week of January 28 2013

3 Stories in the global economy that should not go un-noticed

Investors enjoyed another positive week as major U.S. indices hit multi-year highs. The S&P 500 closed above the 1500 level for the first time since December 10, 2007, climbing 2.1%. In Washington, the House of Representatives punted on the debt ceiling debate, voting last week to raise the debt ceiling for four months without addressing important deficit issues. In more positive news, jobless claims fell for the second week in a row to the lowest level since January 2008.

Here are the 3 stories this week that rose above the noise:

The Biggest Housing Bubble in the World Is in…Canada?
A recent article from The Atlantic summarizes growing concerns over housing prices in Canada, which have remained resilient thus far despite efforts by Canadian authorities to softly deflate housing values. We have a generally positive view of the Canadian economy, which we believe has some of the best demographic trends in the developed world and a wealth of natural resources. However, a key risk to the outlook is the potentially overvalued housing market and high level of consumer debt summarized in this article, which we will be watching closely throughout 2013.

Durable Goods Demand Points to U.S. Factory Pickup

Orders for durable goods strengthened in December, improving by 4.6 percent according to the Commerce Department — ahead of expectations for 2 percent growth. The sharp increase in durable goods orders at year-end provided evidence that improving business confidence for increased global growth outweighed concern for economic contraction resulting from the fiscal cliff situation.

Improvements in auto sales, aircraft and manufacturing helped boost orders for durable goods. Durable goods orders are volatile from month to month, but have risen for four consecutive months for the first time since the metric has been measured (1992).

Time to Celebrate?

Only a short time ago, many were worried that the European debt crisis would spiral out of control, ultimately leading to bond defaults and a breakup of the euro currency. Fast forward six months and bonds of many peripheral economies such as Ireland have been on fire, while yields have dropped to more sustainable levels.

Spanish 10-year yields have dropped below 5 percent for the first time in nearly a year. While fear over Europe has subsided, this doesn’t mean policy makers have taken the quiet period as an opportunity to fix the continent’s underlying issues of slow growth, high unemployment and large deficits. Citigroup’s Willem Buiter puts it best, “European policy makers only move at gunpoint, and the only gun around is the market.”