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Weekly Economic Financial Commentary March 26, 2010
Weekly Economic Financial Commentary March 26, 2010
Weekly Economic Financial Commentary March 26, 2010
Weekly Economic Financial Commentary March 26, 2010
Weekly Economic Financial Commentary March 26, 2010
Weekly Economic Financial Commentary March 26, 2010
Weekly Economic Financial Commentary March 26, 2010
Weekly Economic Financial Commentary March 26, 2010
Weekly Economic Financial Commentary March 26, 2010
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Weekly Economic Financial Commentary March 26, 2010

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Public policy dominated this week, with the passage of health-care reform and confirmation the social security system would run into deficit this year contributing to disappointing Treasury auctions …

Public policy dominated this week, with the passage of health-care reform and confirmation the social security system would run into deficit this year contributing to disappointing Treasury auctions and higher bond yields.

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  • 1. March 26, 2010 Economics Group Weekly Economic & Financial Commentary U.S. Review Existing & New Single Family Home Sales Seasonally Adjusted Annual Rate - In Millions Public Policy Grabs Center Stage 1.6 7.0 • Public policy dominated this week, with the passage of 1.4 6.5 healthcare reform and confirmation the social security 1.2 6.0 system would run into deficit this year contributing to 1.0 5.5 disappointing Treasury auctions and higher bond yields. • Advance orders for durable goods rose in line with 0.8 5.0 expectations, but a large downward revision to January’s 0.6 4.5 nondefense capital goods orders raises a red flag as to 0.4 4.0 how strong capital spending will be in the first quarter. • Sales of new and existing homes both declined in 0.2 New Home Sales: Feb @ 308 Thousand (Left Axis) 3.5 Existing Home Sales: Feb @ 4.4 Million (Right Axis) February, raising fears the incipient recovery in housing 0.0 3.0 has faltered. 2002 2003 2004 2005 2006 2007 2008 2009 2010 Global Review Argentine Real Gross Domestic Product Year-over-Year Percent Change The Argentine Economy Surprises on the Upside 15% 15% • The Argentine economy grew by 2.6 percent during the 10% 10% last quarter of 2009 compared to the same period a year 5% 5% earlier, and by 0.9 percent for the whole year. • The most important contributor to last year’s GDP 0% 0% performance for the Argentine economy was the collapse -5% -5% of imports. • Government consumption increased by 7.7 percent -10% -10% during the last quarter of 2009 compared to the same -15% -15% period a year earlier, and rose 7.2 percent for the year as Real Gross Domestic Product: Q4 @ 2.6% a whole. -20% -20% 2000 2002 2004 2006 2008 2010 Inside Wells Fargo U.S. Economic Forecast Actual Forecast Actual Forecast U.S. Review 2 1Q 2Q 2009 3Q 4Q 1Q 2Q 2010 3Q 4Q 2006 2007 2008 2009 2010 2011 U.S. Outlook 3 Real Gross Domestic Produc t 1 - 6.4 - 0.7 2.2 5.9 3.4 2.0 2.0 2.3 2.7 2.1 0.4 - 2.4 2.9 2.5 Global Review 4 Personal Consumption 0.6 - 0.9 2.8 1.7 2.2 1.0 1.4 1.6 2.9 2.6 - 0.2 - 0.6 1.6 1.7 Global Outlook 5 Inflation Indic ators 2 Point of View 6 "Core" PCE Deflator 1.7 1.6 1.3 1.5 1.4 1.2 1.2 1.2 2.3 2.4 2.4 1.5 1.3 1.7 Consumer Pric e Index - 0.2 - 1.0 - 1.6 1.5 2.5 2.4 1.9 1.6 3.2 2.9 3.8 - 0.3 2.1 2.1 Topic of the Week 7 Industrial Produc tion 1 - 19.0 - 10.4 6.4 6.6 8.3 3.9 3.4 6.5 2.3 1.5 - 2.2 - 9.7 4.9 5.7 Market Data 8 2 Corporate Profits Before T axes - 19.0 - 12.6 - 6.6 24.0 22.0 16.0 10.0 8.5 10.5 - 4.1 - 11.8 - 5.1 13.8 8.0 3 T rade Weighted Dollar Index 83.2 77.7 74.3 74.7 75.4 76.8 78.5 80.1 81.5 73.3 79.4 74.7 80.1 83.6 Unemployment Rate 8.2 9.3 9.6 10.0 9.7 9.8 10.1 10.0 4.6 4.6 5.8 9.3 9.9 9.6 4 Housing Starts 0.53 0.54 0.59 0.56 0.59 0.64 0.67 0.70 1.81 1.34 0.90 0.55 0.65 0.76 Quarter- End Interest Rates Federal Funds T arget Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50 5.25 4.25 0.25 0.25 0.50 3.25 Conventional Mortgage Rate 5.00 5.42 5.06 4.88 5.40 5.70 5.80 5.80 6.14 6.10 5.33 4.88 5.80 6.10 10 Y ear Note 2.71 3.53 3.31 3.85 3.70 3.80 4.00 4.10 4.71 4.04 2.25 3.85 4.10 4.50 Forecast as of: March 10, 2010 1 C ompound Annual Growth Rate Quarter-over-Quarter 2 Year-over-Year Percentage C hange
  • 2. Economics Group U.S. Review Wells Fargo Securities, LLC U.S. Review Strange Days in the Credit Markets Yield Curve Spread The bond market is the ultimate truth detector and its verdict on Basis Points 300 300 healthcare reform is the new law will be more costly than the 10Y - 2Y: Feb @ 283 bps Congressional Budget Office (CBO) estimated and budget deficits 250 2Y - FFR: Feb @ 73 bps 250 will be larger. The bond market was already on edge from the ongoing Greek debt saga and reports that Berkshire Hathaway 200 200 and a handful of other businesses can now borrow more cheaply 150 150 than the U.S. Treasury. The CBO confirmed the Social Security system would pay out more in benefits this year than it receives in 100 100 taxes, something that was not supposed to occur until 2016. The 50 50 Social Security shortfall means the Treasury will need to redeem the “special issue notes” issued to the Social Security trust fund, 0 0 which will require the Treasury to sell real bonds, which has become more challenging in recent weeks. -50 -50 The last few years have seen Treasury yields rise during the -100 -100 spring, triggering a whole new set of challenges. History looks -150 -150 like it will repeat itself this year, with the end of the Fed’s 1996 1998 2000 2002 2004 2006 2008 2010 mortgage-backed securities purchases next week adding to the upward drift in yields. The supply of bonds coming to market will Inventory of New Homes for Sale remain a challenge, with additional money needed to pay Social Months of New Homes For Sale at Current Sales Rate 14 14 Security benefits and recapitalize Fannie Mae and Freddie Mac. Months' Supply: Feb @ 9.2 Sovereign credit risk and worries about growing supply also 12-Month Moving Average: Feb @ 8.7 extend to municipalities, which saw yields climb sharply recently. 12 12 Rising interest rates will make it hard for the housing recovery to gain momentum. The latest numbers are clearly troubling, 10 10 although anecdotal reports from builders and Realtors are not nearly as pessimistic as February’s home sales were. New home 8 8 sales fell to a new all-time low in February, falling 2.2 percent to 308,000. Builder sentiment also remains near all-time lows but builders are reporting some improvement in sales and buyer 6 6 interest. On a net basis, housing is likely modestly stronger this year than last year. Supply remains a big issue, with a 9.2-month 4 4 supply of new homes currently available for sale. The harsh weather had less of an impact on existing home sales, 2 2 which fell 0.6 percent in February. Single-family sales fell 89 91 93 95 97 99 01 03 05 07 09 1.4 percent, while condominium prices posted a slight increase. Maybe all that cold weather up North boosted the attractiveness NonDefense Capital Goods Orders, Ex-Aircraft Series are 3-Month Moving Averages of all those vacant condos in South Florida. The inventory of 40% 40% homes available for sale rose to an 8.6-month supply, as more homes are put up for sale in anticipation of the key spring home 30% 30% buying season and the expiration of the tax incentives. 20% 20% The unusually prolonged drawdown in inventories has set off a 10% 10% strong cyclical recovery in parts of the factory sector. Advance orders for durable goods posted a 0.5 percent gain in February 0% 0% with January’s numbers being revised higher. Big gains in orders for machinery appear to be driving the overall increase. New -10% -10% orders for nondefense capital goods, excluding aircraft, rose 1.1 -20% -20% percent in February, but the previous month’s decline was a percentage point worse than first reported and now shows a 3.9 -30% -30% percent drop. The downward revision should cause forecasters to -40% 3-Month Annual Rate: Feb @ 9.3% -40% pull back their estimates for first quarter economic growth and Year-Over-Year Percent Change: Feb @ 5.4% may also signal a weaker trend for capital spending in general for -50% -50% 2010. 93 95 97 99 01 03 05 07 09 2
  • 3. Economics Group U.S. Outlook Wells Fargo Securities, LLC Personal Income and Spending • Monday Personal income is expected to advance at a moderate 0.2 percent pace in February. Aggregate income data from the February Personal Income Month-over-Month Percent Change employment report proved disappointing, falling 0.2 percent on the 4% 4% Personal Income: Jan @ 0.1% month. This should continue to weigh on the wage and salary 3% 3% growth component of income. Personal consumption expenditures are expected to rise a more tepid 0.2 percent in February, after 2% 2% strong gains of 0.5 percent in January. Unit vehicle sales dropped 2.0 percent in February, which will be an important factor behind 1% 1% the somewhat slower trend in overall consumption spending. The chain PCE price index should continue to point toward slowing 0% 0% consumer inflation. Headline PCE is expected to be unchanged in February, reducing the year-0n-year growth rate to 1.8 percent. -1% -1% Fears of inflation forcing the Fed’s hand on interest rates appear overplayed at the moment. -2% -2% Previous: 0.1 percent Wells Fargo: 0.2 percent -3% -3% 2000 2002 2004 2006 2008 2010 Consensus: 0.2 percent ISM Manufacturing • Thursday Regional manufacturing surveys for March suggest that ISM Manufacturing Composite Index Diffusion Index manufacturing expansion remains firmly in place as we close out 65 65 the first quarter. The rapid recovery in global trade, combined with the end of aggressive inventory cutting in the United States, is 60 60 helping to boost manufacturing production at a healthy pace despite still-sluggish final demand growth from consumers and 55 55 businesses. The March ISM index is expected at 56.7. This is a slight improvement from February’s 56.5 reading, but still below 50 50 January’s 58.4, which marked the highest level since August 2004. The Chicago Business Barometer and Philadelphia Fed index both 45 45 improved in March, though the Empire index moderated, 40 40 suggesting a somewhat mixed picture on production gains in March. These ISM manufacturing levels are consistent with 6 to 35 35 7 percent industrial production growth on an annualized basis. ISM Manufacturing Composite Index: Feb @ 56.5 12-Month Moving Average: Feb @ 49.9 30 30 Previous: 56.5 Wells Fargo: 56.7 87 89 91 93 95 97 99 01 03 05 07 09 Consensus: 56.5 Employment • Friday For March, we are finally expecting to see a positive net non-farm Nonfarm Employment Growth payroll print. The payroll report for February was encouraging in Yr/Yr Percent Change vs 3-Month Percent Change, Annual Rate this regard: it revealed only a modest 36,000 net job loss in a 5% 5% month plagued by winter storms, suggesting the U.S. economy is on 4% 4% the verge of positive employment growth. A strong monthly boost 3% 3% from Census Bureau hiring should be the catalyst that finally 2% 2% pushes the payroll change into positive territory. The 1% 1% unemployment rate is expected to hold steady at 9.7 percent, 0% 0% though re-entering job seekers could still push the unemployment -1% -1% rate slightly higher in the months to come. Look for additional -2% -2% gains in working hours and hourly earnings to confirm the firmer labor market tone. Jobless claims remain stubbornly high, pointing -3% -3% to a weak underlying trend in private employment growth, and -4% -4% consumer confidence stumbled in light of labor market uncertainty. -5% -5% 3-Month Annual Rate: Feb @ -0.5% -6% -6% Year/Year Change: Feb @ -2.5% Previous: -36 K Wells Fargo: 177 K -7% -7% 91 93 95 97 99 01 03 05 07 09 Consensus: 150 K 3
  • 4. Economics Group Global Review Wells Fargo Securities, LLC Global Review The Argentine Economy Surprises on the Upside Argentine Consumer Price Index Year-over-Year Percent Change According to the INDEC, Argentina’s statistical institute, the 14% 14% country’s economy grew by 2.6 percent during the last quarter of 2009 compared to the same period a year earlier. This result 12% 12% followed two consecutive negative quarters when the economy dropped by 0.8 percent and 0.3 percent in the second and third 10% 10% quarters, respectively. The fourth quarter growth helped the economy to avoid a negative performance during the whole of 8% 8% 2009 by posting an annual growth rate of 0.9 percent. Interestingly enough, the economy’s performance during the last 6% 6% quarter of the year was boosted by very strong personal consumption expenditures, which increased by 2.9 percent after 4% 4% dropping by 1.8 percent and 0.7 percent during the second and third quarters, respectively. However, personal consumption 2% 2% expenditures increased by only 0.5 percent during the whole of 2009. Consumer Price Index: Feb @ 9.1% 0% 0% The most important contributor to last year’s Argentine GDP 2004 2005 2006 2007 2008 2009 2010 performance was the collapse of imports. Imports of goods and services plunged by 19.0 percent in real terms during the year, Argentine Merchandise Trade Balance Millions of USD, Not Seasonally Adjusted while exports of goods and services dropped by only 6.4 percent. $3,000 $3,000 Thus, the strong drop in imports helped the economy prevent a deeper recession during the year as imports are a subtraction to GDP. On the other hand, the second most affected sector during $2,000 $2,000 2009 was gross fixed investment, which dropped by 10.2 percent during 2009, the worst performance since the 2001-2002 financial crisis when gross fixed investment collapsed by a $1,000 $1,000 cumulative 52.1 percent in real terms. Another contributor to growth during the year was strong $0 $0 government consumption. Government consumption increased by 7.7 percent during the last quarter of 2009 compared to the same period a year earlier, and rose 7.2 percent for the year as a -$1,000 -$1,000 whole. Thus, the Fernández-Kirchner administration continued to support economic growth through very strong fiscal policy at a Merchandise Trade Balance: Feb @ USD $604M time when fiscal revenues continued to dwindle due to the effects -$2,000 -$2,000 of the worldwide recession. Government consumption during 1997 1999 2001 2003 2005 2007 2009 2009 was stronger than during the previous year even though the Argentine economy grew by 6.8 percent during 2008. Argentine Industrial Production Index Compound Annual Growth Rate This is one of the reasons why many analysts are wondering if 50% 50% this policy is sustainable, considering that the Argentine 40% 40% government has been an international “pariah” and has not had access to international capital markets since the country’s default 30% 30% back in 2001. Many are wondering how long will it take for the 20% 20% country to default on its debt again if it cannot continue to finance its increased expenditures. 10% 10% So far the administration has been able to “find” domestic 0% 0% financing through several measures that have captured increased revenues, but the situation is getting tougher, fundamentally -10% -10% because the government has lost the majority in the Argentine Congress and it is becoming more difficult to bypass the -20% -20% institution to continue the spending spree. -30% IPI: Jan @ -4.9% -30% 3-Month Moving Average: Jan @ 13.8% -40% -40% 1997 1999 2001 2003 2005 2007 2009 4
  • 5. Economics Group Global Outlook Wells Fargo Securities, LLC German Unemployment • Wednesday Despite the deep German recession—real GDP contracted nearly German Unemployment Rate 7 percent between early 2008 and early 2009—the unemployment Seasonally Adjusted rate in Germany has barely risen. However, the unemployment rate 13.0% 13.0% understates the weakness of the German labor market because many workers have been put on “short shifts” (i.e., hours worked 12.0% 12.0% have been reduced). The consensus forecast anticipates a small increase in the number of unemployed workers in March when the 11.0% 11.0% data print on Wednesday. Preliminary CPI data for March are expected to show few inflationary pressures in Germany at present. 10.0% 10.0% Other data will offer further insights into the current state of the Euro-zone economy. Italy releases unemployment and CPI data as 9.0% 9.0% well next week. In addition, the sizeable increases in the Euro-zone PMIs that were reported in March are expected to be confirmed by final data next week. 8.0% 8.0% Unemployment Rate: Feb @ 8.1% Previous: 8.2% 7.0% 7.0% 1997 1999 2001 2003 2005 2007 2009 Consensus: 8.2% Canadian GDP • Wednesday Like its large neighbor on its southern border, the Canadian Canadian Real GDP Bars = Compound Annual Rate Line = Yr/Yr % Change economy has grown for the past two quarters after enduring a 6.0% 6.0% painful recession. Canada is alone among major countries that provide GDP data on a monthly basis, and data that are slated for 4.0% 4.0% release on Wednesday are expected to show the economy continued to expand at a strong pace in January. If the consensus forecast is 2.0% 2.0% realized, then the Canadian economy would be on pace to register an annualized growth rate in excess of 4 percent in the first quarter 0.0% 0.0% of 2010. -2.0% -2.0% Data on raw material and industrial prices are also on the docket next week. Although prices of raw materials have risen significantly -4.0% -4.0% over the past year, the Bank of Canada is not likely to raise rates anytime soon because the core rate of CPI inflation remains very -6.0% -6.0% benign (i.e., only 1.3 percent in January). Compound Annual Growth: Q4 @ 5.0% Year-over-Year Percent Change: Q4 @ -1.2% -8.0% -8.0% Previous: 0.6% (month-on-month change) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Consensus: 0.5% Japanese Tankan Index • Thursday The quarterly Tankan survey that is conducted by the Bank of Japanese Tankan Survey & Real GDP Japan is widely watched by investors. Not only does it contain a Index, Year-over-Year Percentage Change treasure trove of data on the Japanese economy, but the “headline” 60.0 6.0% index, which measures sentiment among large manufacturers, is 4.0% fairly correlated with real GDP growth. If, as expected, the 40.0 “headline” index rises further, then investors will infer that the 2.0% year-over-year growth rate in GDP in the first quarter rose into 20.0 positive territory for the first time in two years. 0.0% Monthly data for February will offer further details about the 0.0 -2.0% present state of the Japanese economy. The consensus forecast looks for a small drop in industrial production last month, which, if -4.0% -20.0 realized, would be the first decline in IP in a year. Data on retail -6.0% spending, the labor market and housing starts are also on the docket next week. -40.0 Tankan Index: Q4 @ -24.0 (Left Axis) -8.0% Year-over-Year Percent Change: Q4 @ -0.9% (Right Axis) Previous: -24 -60.0 -10.0% 1996 1998 2000 2002 2004 2006 2008 Consensus: -14 5
  • 6. Economics Group Point of View Wells Fargo Securities, LLC Interest Rate Watch Consumer Credit Insights Cyclical Rise in Rates Reinforced by Central Bank Policy Rates ABS Slowdown May Hinder Spending Structural Deficits. 7.5% 7.5% US Federal Reserve: Mar - 26 @ 0.25% ECB: Mar - 26 @ 1.00% During the credit boom, issuance of asset- Over the last few weeks the typical cyclical Bank of Japan: Mar - 26 @ 0.10% Bank of England: Mar - 26 @ 0.50% backed securities (ABS) soared, peaking at 6.0% 6.0% pattern of rising interest rates has become $1.2 trillion in 2006. Since then, ABS more obvious. Improved economic activity issuance has fallen off a cliff, with a mere 4.5% 4.5% tends to be associated with rising credit $177.4 billion being issued in 2009, a demand. With each economic recovery, the whopping 86 percent decline from the 3.0% 3.0% demand for credit tends to increase as peak. While the year-to-date total through firms raise their expectations for stronger 1.5% 1.5% March 2010 of $27.9 billion is 42 percent final sales. Meanwhile, on the credit supply above the same period in 2009, issuance side, the opposite pattern starts to emerge 0.0% 0.0% through the rest of the year will have to as the Federal Reserve begins to withdraw 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 largely match the last nine months of 2009 liquidity. For now, many investors appear Yield Curve in order for 2010 totals to surpass 2009. to anticipate that the Federal Reserve will U.S. Treasuries, Active Issues 5.00% 5.00% Unfortunately, that may not happen. After maintain its accommodative policy for the 4.50% 4.50% rebounding from a scant $600 million in rest of this year. This may be true for the 4.00% 4.00% October 2008 to $26.4 billion in politically sensitive federal funds rate but 3.50% 3.50% September 2009 as investors’ risk appetite behind the scenes the risk is that the cost of 3.00% 3.00% returned, ABS issuance has slowed to just funds is likely to rise while longer rates will 2.50% 2.50% $9.2 billion in March 2010 as investors also rise as the Fed reduces its role in the 2.00% 2.00% have turned cautious again. Following the Treasury and mortgage backed security 1.50% 1.50% cash-for-clunkers surge in fall 2009, auto markets. 1.00% 1.00% March 26, 2010 ABS issuance has been cut in half. Credit Structural Deficits Reinforce the 0.50% March 19, 2010 February 26, 2010 0.50% card issuance has fared even worse as no Cycle 0.00% 0.00% securities have been issued in two of the 3M 2Y 5Y 10 Y 30 Y In the last two weeks the long-run outlook last three months, leaving the three-month Forward Rates for U.S. fiscal deficits has deteriorated for 90-Day EuroDollar Futures moving average at just $370 million versus 2.25% 2.25% two reasons: Social Security and about $8.0 billion last summer. healthcare. Recent estimates suggest that 2.00% 2.00% Furthermore, the Fed’s assistance is the Social Security fund will experience 1.75% 1.75% waning as ABS holdings via the TALF have spending outflows in excess of revenue 1.50% 1.50% actually declined since December. inflows this year—much earlier than prior 1.25% 1.25% Over the last couple years, consumer estimates. This suggests the entitlement spending growth has been closely linked to 1.00% 1.00% problems that were anticipated with the ABS issuance, lagging it by about six to retirement of the baby boom generation are 0.75% 0.75% nine months. Thus, the recent slowing of coming earlier than many expected. 0.50% March 26, 2010 March 19, 2010 0.50% ABS issuance suggests consumer spending February 26, 2010 growth could remain sluggish as we head Meanwhile, the budget implications of 0.25% Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 0.25% into the summer. healthcare have become more visible. First, there is lots of skepticism on the ability of Mortgage Data future Congresses to really enforce cuts in Medicare. Second, there are very few Week 4 Weeks Year elements in the healthcare bill to control Current Ago Ago Ago costs. Mortgage Rates Research done at the Federal Reserve 30- Y r Fixed 4.96% 4.95% 4.93% 4.98% suggests that it is expected future federal 15- Y r Fixed 4.33% 4.32% 4.33% 4.61% deficits that influence interest rates today. 5/1 ARM 4.09% 4.05% 4.12% 4.98% Financial markets are forward-looking and 1- Y r ARM 4.12% 4.22% 4.23% 4.91% the outlook is not good. This outlook is reinforced by the understanding that much MBA Applic ations of the Federal deficit in the last year has Composite 620.9 633.1 600.5 876.9 been purchased by the Fed and Asian Purc hase 221.5 226.8 212.3 257.1 buyers—two buyers that the markets are Refinanc e 2,955.9 3,007.2 2,860.1 4,497.6 less confident about going forward. Source: Freddie Mac, Mortgage Bankers Association and Wells Fargo Securities, LLC 6
  • 7. Economics Group Topic of the Week Wells Fargo Securities, LLC Topic of the Week A Few Brief Comments on Healthcare Reform Gross Cost of Coverage Provisions The financial markets appeared to have already priced in CBO Estimates, Billions of Dollars $250 $250 passage of the healthcare bill before last weekend. Our early assessment is that, while there is a great deal of cost shifting taking place, the bill that passed was less onerous than many had feared. Unfortunately, the $200 $200 history of massive social spending programs is that they tend to grow larger and larger over time. Moreover, the scoring by the Congressional Budget Office (CBO), $150 $150 which shows the program costing $940 billion and reducing the deficit $138 billion over the 2010 to 2019 period, was based on a strict interpretation of the bill as $100 $100 it was written. The costs will likely be higher than the CBO estimate and the budget deficit will also likely be larger. Savings from Medicare cutbacks will likely be $50 $50 harder to achieve. Moreover, the extended phase-in of the program will likely lead to incessant political pressure to expand benefits and scale back the tax hikes. The healthcare bill will have relatively little impact on $0 $0 economic conditions over the near term as most of the 2010 2012 2014 2016 2018 provisions will not take effect for a couple of years. There is little evidence the new healthcare law will hold U.S. CPI - Medical Care Series are 3-Month Moving Averages down the price of healthcare. Healthcare costs have been 15% 15% rising faster than the overall inflation rate for about as Medical Care 3-M Annual Rate: Feb @ 3.7% Medical Care Yr/Yr Pct Chg: Feb @ 3.5% long as can be remembered. The driving force for this Core CPI Year-over-Year Percent Change: Feb @ 1.5% increase has been the aging population, which has 12% 12% resulted in increased demand of healthcare services and a lack of market discipline in the healthcare marketplace. Most costs are paid indirectly either by 9% 9% insurance companies or the government. This leads to over-consumption and little to no price sensitivity. The higher tax rates on investment earnings will draw 6% 6% more investment dollars into tax avoidance projects and lead to modestly lower investment throughout the economy. Likewise, the new tax on medical devices and 3% 3% pharmaceutical companies could lead to reduced profitability and thus less innovation and product development. 0% 0% Please visit our website for the full report. 80 83 86 89 92 95 98 01 04 07 10 Subscription Info Wells Fargo’s Weekly Economic & Financial Commentary is distributed to subscribers each Friday afternoon by e-mail. To subscribe please visit: www.wachovia.com/economicsemail The Weekly Economic & Financial Commentary is available via the Internet at www.wachovia.com/economics Via The Bloomberg Professional Service at WFEC. And for those with permission at www.wellsfargo.com/research 7
  • 8. Economics Group Market Data Wells Fargo Securities, LLC Market Data ♦ Mid-Day Friday U.S. I nterest Rates Foreign I nterest Rates Frida y 1 W eek 1 Ye a r Frida y 1 W eek 1 Ye a r 3/26/2010 Ago Ago 3/26/2010 Ago Ago 3-Month T-Bill 0.13 0.14 0.14 3-Month Euro LIBOR 0.58 0.58 1.53 3-Month LIBOR 0.29 0.28 1.23 3-Month Ste rling LIBOR 0.65 0.65 1.70 1-Ye a r Tre a sury 0.43 0.40 0.55 3-Month Ca na dia n LIBOR 0.41 0.40 1.05 2-Ye a r Tre a sury 1.06 0.99 0.91 3-Month Ye n LIBOR 0.24 0.24 0.61 5-Ye a r Tre a sury 2.62 2.46 1.79 2-Ye a r Ge rma n 1.00 1.00 1.41 10-Ye a r Tre a sury 3.86 3.69 2.74 2-Ye a r U.K. 1.19 1.25 1.28 30-Ye a r Tre a sury 4.76 4.58 3.65 2-Ye a r Ca na dia n 1.69 1.64 1.18 Bond Buye r Inde x 4.44 4.32 5.00 2-Ye a r Ja pa ne se 0.17 0.15 0.42 10-Ye a r Ge rma n 3.15 3.11 3.13 Foreign Exchange Rates 10-Ye a r U.K. 4.04 3.96 3.31 Frida y 1 W eek 1 Ye a r 10-Ye a r Ca na dia n 3.57 3.48 2.89 3/26/2010 Ago Ago 10-Ye a r Ja pa ne se 1.39 1.37 1.32 Euro ($/€) 1.341 1.353 1.353 British P ound ($/₤) 1.491 1.501 1.445 Commodity Prices British P ound (₤/€) 0.899 0.901 0.936 Frida y 1 W eek 1 Ye a r Ja pa ne se Ye n (¥/$) 92.530 90.540 98.710 3/26/2010 Ago Ago Ca na dia n Dolla r (C$/$) 1.029 1.017 1.231 W TI Crude ($/Ba rre l) 80.47 80.68 54.34 Sw iss Fra nc (CHF/$) 1.065 1.061 1.127 Gold ($/Ounce ) 1104.45 1107.00 934.10 Austra lia n Dolla r (US$/A$) 0.904 0.915 0.702 Hot-Rolle d Ste e l ($/S.Ton) 615.00 615.00 450.00 Me xica n P e so (MXN/$) 12.544 12.585 14.192 Coppe r (¢/P ound) 340.05 336.45 184.95 Chine se Yua n (CNY/$) 6.827 6.827 6.832 Soybe a ns ($/Bushe l) 9.30 9.45 9.54 India n Rupe e (INR/$) 45.240 45.497 50.604 Na tura l Ga s ($/MMBTU) 3.97 4.17 3.95 Bra zilia n Re a l (BRL/$) 1.822 1.802 2.249 Nicke l ($/Me tric Ton) 22,806 22,722 9,507 U.S. Dolla r Inde x 81.604 80.724 84.165 CRB Spot Inds. 501.12 503.52 332.94 Next Week’s Economic Calendar Mon da y T u esda y W edn esda y T h u rsda y Frida y 29 30 31 1 2 Pe r son a l In com e Con su m e r Con fi d en ce Fa ct or y Or d er s ISM Ma n u fa ct u r i n g N on fa r m Pa y r ol l s Ja n u a r y 0 . 1 % Feb r u a r y 4 6 . 0 Ja n u a r y 1 . 7 % Feb r u a r y 5 6 . 5 Feb r u a r y -3 6 K Feb r u a r y 0 . 2 % ( W ) Ma r c h 5 0 . 9 (W ) Feb r u a r y 0 . 3 % ( W ) Ma r c h 5 6 . 7 (W ) Ma r c h 1 7 7 K (W ) U.S. Data Pe r son a l Sp e n d i n g Con st r u ct i on Sp en d i n g Un em p l oy m e n t Ra t e Ja n u a r y 0 . 5 % Ja n u a r y -0 . 6 % Feb r u a r y 9 . 7 % Feb r u a r y 0 . 2 % ( W ) Feb r u a r y -0 . 4 % (W ) Ma r c h 9 . 7 % ( W ) PCE De fl a t or T ot a l V e h i cl e Sa l e s Ja n u a r y 2 . 1 % Feb r u a r y 1 0 . 3 6 M Feb r u a r y 1 . 8 % ( W ) Ma r c h 1 1 . 5 M (W ) Ge r m a n y Ja p a n Ge r m a n y Ja p a n Global Data CPI (Y oY ) Job l e ss Ra t e Un em p l oy m en t Ra t e Lge Ma n u fa ct i n g PMI Pr ev iou s ( Feb ) 0 . 5 % Pr ev iou s ( Ja n ) 4 . 9 % Pr ev iou s ( Feb ) 8 . 2 % Pr ev iou s ( 4 Q ) -2 4 Ja p a n Ca n a d a UK In d u st r i a l Pr od . (MoM) GDP (MoM) PMI Ma n u fa ct u r i n g Pr ev iou s ( Ja n ) 2 . 7 % Pr ev iou s ( Dec ) 0 . 6 % Pr ev iou s ( Feb ) 5 6 . 6 Not e: ( W ) = W el ls Fa r g o Est im a t e ( c ) = C on sen su s Est im a t e 8
  • 9. Wells Fargo Securities, LLC Economics Group Diane Schumaker-Krieg Global Head of Research (704) 715-8437 diane.schumaker@wellsfargo.com & Economics (212) 214-5070 John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wellsfargo.com Mark Vitner Senior Economist (704) 383-5635 mark.vitner@wellsfargo.com Jay Bryson, Ph.D. Global Economist (704) 383-3518 jay.bryson@wellsfargo.com Scott Anderson, Ph.D. Senior Economist (612) 667-9281 scott.a.anderson@wellsfargo.com Eugenio Aleman, Ph.D. Senior Economist (612) 667-0168 eugenio.j.aleman@wellsfargo.com Sam Bullard Economist (704) 383-7372 sam.bullard@wellsfargo.com Anika Khan Economist (704) 715-0575 anika.khan@wellsfargo.com Azhar Iqbal Econometrician (704) 383-6805 azhar.iqbal@wellsfargo.com Adam G. York Economist (704) 715-9660 adam.york@wellsfargo.com Ed Kashmarek Economist (612) 667-0479 ed.kashmarek@wellsfargo.com Tim Quinlan Economic Analyst (704) 374-4407 tim.quinlan@wellsfargo.com Kim Whelan Economic Analyst (704) 715-8457 kim.whelan@wellsfargo.com Yasmine Kamaruddin Economic Analyst (704) 374-2992 yasmine.kamaruddin@wellsfargo.com Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A, Wells Fargo Advisors, LLC, and Wells Fargo Securities International Limited. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2010 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

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