Fisher Investments Editorial Staff
Developed Markets, Media Hype/Myths, US Economy

Pain in Spain, But Gains in US

By, 12/16/2010
 

Story Highlights:

  • Moody's announced on Wednesday it may cut Spain's credit rating.
  • Spain's potential downgrade doesn't mean much, and there are substantial backstops in place to prevent PIIGS countries from near-term default.
  • In the US, November industrial production data came in above expectations, with business spending leading the improvement, and inflation remained tame.

__________________________________________________________________

Lest we go a week without PIIGS news, Moody's announced on Wednesday it may cut Spain's credit rating from Aa1 on concerns over the abilities of the country and its banks and regional governments to meet funding requirements for next year.  

We've pointed to the shaky credibility of ratings agencies themselves and have noted the substantial backstops in place should Spain or any additional PIIGS country need help. Ratings agencies have consistently been late to the party, and this potential downgrade has diminished meaning for investors. Spanish 10-year yields ended Wednesday lower, and Tuesday's auction went off successfully, though at higher rates. Thursday's auction will likely be more closely watched.  

Of course, fiscal problems do exist in the PIIGS. But with only a fraction of the €750 billion in available EU/ECB/IMF bailout funds tapped—and European leaders not averse to increasing the size and duration of the funds should the situation call for it—defaults in these countries are likely off the table for the foreseeable future as it matters to stocks.  

News back home was more cheery. The Federal Reserve reported US November industrial production data came in above expectations. Manufacturing production rose, with large gains in the output of business equipment and supplies. Business spending has been an important factor driving the economic recovery and looks poised to continue leading the expansion. (Though consumer spending isn't looking too shabby at the moment either.) 

Additionally, the Fed reported the capacity utilization rate—or to what extent industrial plants are operating—hit 75.2% in November. The reading's the highest since October 2008 and is more evidence of ongoing economic expansion. However, the rate averaged over 80% from 1972 to 2009, showing manufacturers still have plenty of room to increase production without incurring the costs of building new or expanding existing facilities—taking away some producer pricing power and keeping a lid on prices, at least for now.  

Indeed, US CPI edged up only 0.1% in November from the prior month and increased just 1.1% from a year ago. Core CPI (excluding volatile energy and food prices) rose 0.1% m/m and 0.8% y/y. Amazingly, there were earnest fears of US stagflation just a year ago, and today the data shows the opposite is happening—illustrating how worries that government spending or "easy money" would jeopardize the recovery appear overwrought.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:



*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.