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CNB Weekly Economic Commentary: January 14

January 14, 2013

To: Everyone
From: Gregory S. MacKay, Senior Vice President & Chief Economist
Date: 01/11/13

While the players are formulating strategy for the great debate over the debt ceiling, and various other tax credits/incentives/increases, we’ll take a breather and look at some of the data from the past couple of weeks.

The biggest headline grabber was last week’s release of the FOMC minutes of the December meeting. Participants continued to predict a moderately improving economy, with slightly better hopes for GDP growth in 2013 and beyond. The central belief was for a 3.4%-3.5% real growth rate by 2015. Unemployment projections were slightly better for 2013–2015, but with a central belief that the rate could still be 6%–6.5% in 2015. PCE inflation expectations continue to fall, with a 1.9%-2% range most likely by 2015. Participants continue to express concern over U.S. fiscal policy (the meeting was held December 11-12, 2012), and the situation in Europe. While agreeing to continue the $85 billion per month purchase of securities, there was some serious discussion (for the first time) over the length of the program. Members were divided into three camps: securities purchases ending before the end of 2013, securities purchases ending “at about” year end 2013, and securities purchases continuing without a specific total or time frame. The statement released after the meeting only verified that both asset purchases and low federal funds rates would continue “until labor markets improve in a context of price stability”. So the message hasn’t changed, but the full minutes of the session show the concern of several FOMC members over the longer term effects of such long term easing. That was enough to drive bond markets lower, as some traders saw rate tightening on the horizon.

Employment numbers for December remained mildly encouraging. There was a gain of 155,000 jobs in December, about an average monthly gain in 2012. The unemployment rate remained at 7.8%. Job growth picked up the pace in construction, manufacturing, and health care, while slowing in retail, transportation, information, temporary help, and government. Weekly hours worked were virtually unchanged for 2012. Average weekly earnings as reported by the Bureau of Labor Statistics rose 2.4% to $818.69. This increase was more than most measures of inflation, but not a robust improvement. So job growth and income continued to slowly improve throughout 2012.

Early holiday shopping reports remain mixed, and we’ll get a look at December retail sales next week. However, consumers seemed to step a little more lively in November, as consumer credit rose a very healthy 7%. Credit card usage remains volatile, with every month bringing a change in direction (September -3.1%, October +4.8%, November +1.1%). Auto, boat, vacation, and educational loans were the all-stars in November, increasing 9.6% ($183 billion annualized) as consumers went on a big ticket buying spree.

Stock prices were slightly higher this week. Fourth quarter 2012 earnings reports began to drift in, and the general feeling of a disaster averted in the “fiscal cliff” negotiations continues to buoy the markets. At 2:50 p.m., for the week and year:

Dow Industrials 13481 +.3% +2.9%
NASDAQ 3122 +.6% +3.4%
S&P 500 1470 +.3% +3.1%

Bond prices firmed this week after last week’s shudder at the Fed minutes, and are trading through early December levels. Bonds remain very expensive. 

  US Treasuries
Municipal Bonds
  1/11/13 1/4/13 1/11/13 1/4/13
2 year .24% .27% .37% .42%
5 year .78% .82% .83% .95%
10 year 1.87% 1.92% 1.74% 1.82%