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Experts Talk Construction Spending, ISM, 'Bond Vigilantes'

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Jan. 4. Ted Wieseman, Morgan Stanley (MS) November construction spending (–0.6%) show[ed] modest weakness, as expected, on top of a downward revision to October (–0.5% vs. 0.0% [previously]). Softness in November was largely a result of continued downside in government, which is not showing much sign of a meaningful stimulus boost, while the October revision was concentrated in an even bigger collapse in nonresidential activity. Residential activity showed somewhat lower-than-expected underlying growth over both months. Incorporating these results, we lowered our Q4 GDP forecast a couple of tenths to +4.8%. Beth Ann Bovino, Standard & Poor's The U.S. Institute for Supply Management manufacturing index rose 2.3 points to 55.9 in December. It was better than the 54.0 expected by markets and the highest reading for 2009. Gains were seen in most components. New orders surged 5.2 points to 65.5, while inventories increased to 43.4 in December from 41.3 the month before, though still below the 50-point benchmark, indicating contraction. Employment rose to 52.0 from 50.8 in November, while the backlog of orders fell 2 points to 50 in December. The better-than-expected reading will likely help support stock prices and bond yields today, though the soft construction spending report may trump the news. Edward Yardeni, Yardeni Research Will the bond vigilantes be the persons of the year in 2010? The latest economic indicators confirm that [Fed Chairman Ben] Bernanke has succeeded in reviving economic growth. Indeed, [Chief Economist] Debbie [Johnson] and I are forecasting that real GDP might have increased by 6.5% during the final quarter of 2009. The Fed is already working on exit strategies to unwind the extraordinary measures devised to ease monetary policy. These include large-scale reverse repos and a new "term deposit facility" for banks. As a result, the 10-year Treasury yield jumped by 65 basis points from 3.21% on Nov. 30 last year to 3.86% this morning [Jan. 4]. The 30-year fixed mortgage rate is back up over 5%. The spread of these two remains relatively tight, but could widen when the Fed shortly stops buying Agencies. The risk is that the bond vigilantes might hold the global economic recovery as a hostage unless governments around the world act quickly and decisively to reduce their structural budget deficits. Around the world, bond vigilantes are getting especially riled up about sovereign debt. Governments are issuing too much of the stuff. Tobias Levkovich, Citigroup (C) After a tumultuous 2009 and a roughly 25% gain in equities, the probabilities of sustained double-digit appreciation in 2010 seem rather low when looking back at history. In the past, during the year after the one in which recessions ended, the S&P 500 has gained less than 1%, on average, despite earnings growth that averaged better than 10%. Since we expect teen-like EPS gains in 2010, equities can move higher but one should not anticipate substantial gains for the full year. Nonetheless, we have tweaked our S&P 500 target up to 1175 from 1150. While a risk-oriented trading posture still seems appropriate early in 2010, a shift to more defensive segments of the market may be required sometime in the second quarter of 2010. Thus, investors will find it necessary to adjust their portfolios more frequently in order to post strong relative returns.

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