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Calvert Investments’ Week in Review—Week Ended 6/15/12 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Equity Market Commentary The 10-year yield on Italian sovereign debt increased in sympathy throughout the week, but dropped below the 6% threshold by the week’s By Natalie Trunow, end. Italy is having difficulty implementing labor Chief Investment Officer, reforms and is now in a severe recession. Equities Calvert Investment France lowered its retirement age, assuring a Management, Inc. higher probability of France “graduating” into a peripheral economy over time. German bond spreads relative to the U.S. stayed wide with the German economy likely slipping For the week, the S&P 500, Russell 1000, into recession. Russell 2000, MSCI EAFE, and MSCI Emerging Market indices returned 1.34%, 1.12%, 0.33%, Greek elections will be held this Sunday. Reports 2.32%, and 2.35%, respectively. The top three surfaced late in the week that secret polls were performing sectors in the Russell 1000 were giving an edge to the New Democracy Party, telecoms, energy, and healthcare, while which would adhere to the international bailout consumer discretionary, materials, and IT agreement. Whatever the outcome, the lagged. sovereign debt crisis in Europe is likely to continue with or without Greece’s potential exit The eurozone continues to struggle with its from the eurozone. sovereign debt crisis and accelerating recession. European core economies continue The Bank of England announced a $150 billion to show signs of weakness. Industrial liquidity program at the end of the week. production in the eurozone declined 0.8% in April from the prior month and was down 2.3% on a year-over-year basis. Core CPI was Economic growth in China continues to slow, up 1.6%, while headline CPI was up 2.5% on a although this week’s data showed slight year-over-year basis in May. Deflation in improvement in industrial production, retail Europe is not out of the question in the near sales, new loans and foreign investment. future, which could be a significant problem. Reports indicated daily withdrawals from In the U.S., this week’s data showed a slight Greek banks have ranged from €100 million to decline in retail sales, although sales of motor €500 million this month. vehicles were up, reflecting continued challenges in the labor market. Initial jobless claims Eurozone officials agreed to a €100 billion increased to 386,000 for the week ending June 9, bailout for Spain’s banks. However, the debt after the prior week’s initial claims were revised still went through the government and not as upward to 380,000. The four-week moving direct financing to banks, which will increase average is now up to 382,000. At the same time, Spain’s debt load. Not surprisingly, Moody’s continuing claims fell slightly and small business downgraded Spain’s credit rating this week by employment data held up okay. The University of three notches to Baa3, one level above junk Michigan Survey Of Consumer Sentiment status. Investors responded to the country’s preliminary reading for June indicated consumer “admission” of the problems in their banking confidence dropped from the prior month. sector by pushing yields up even higher on Spanish sovereign debt, with the 10-year yield U.S. housing activity continues to recover. ending the week at 6.87%. Mortgage applications, as measured by the Mortgage Bankers Association (MBA) Mortgage Applications Index, surged 18% during the period ending June 8, while the refinance gauge also increased. A low dollar is contributing to Key Market Indicators improvement in U.S. housing activity. Indicator 6/15/12 6/8/12 According to data released by the National Fed Funds Target 0%-0.25% Unchanged Association of Realtors during the week, Rate international buyers accounted for 9% of total 10-Year Treasury 1.58% -6 basis points spending on residential real estate in the U.S. Bond Yield over the trailing 12-month period ending in DJIA 12,767.17 + 212.97 (+3.59%) March of this year. This represented a 24% S&P 500 1,342.84 + 17.18 (+3.73%) year-over-year increase in sales to Oil $84.03 -$-0.07 international buyers, as foreigners, especially Canadians, have been taking advantage of the U.S. $ vs. Euro € 0.7914 - € 0.0076 weak dollar and historically low U.S. home U.S. $ vs. Yen ¥ 78.73 -¥ 0.76 prices. Unemployment 8.2% (May) 8.1% (April) The U.S. Consumer Price Index (CPI) declined April Year Ago 0.3% in May from the prior month, a slightly larger drop than anticipated, and was up 1.7% Consumer Price 228.53 + 1.7% Index on a year-over-year basis compared to 2.3% in Source: Calvert Investment Management, Inc. April. Core CPI, which excludes the more volatile food and energy components, was up 0.2% from the prior month and 2.3% on a year-over-year basis, in line with expectations. The Producer Price Index (PPI) declined 1% in May from the prior month, a significantly greater drop than forecast, and was up just 0.7% on a year-over-year basis. Gasoline declined 8.9% on a month-over-month basis, contributing to the unexpected large decline in May’s PPI. These data support the low inflation expectations and will allow the Fed to continue with quantitative easing initiatives, such as an extension of “operation twist” and/or purchases of asset-backed securities, if necessary. These data suggest that, while a global economic slowdown is likely having a marginally negative impact on the U.S. economy, it is still likely to continue its slow expansion for the time being, although the impending fiscal cliff in the U.S. will likely cause further indigestion for investors globally. Fixed-Income Market Commentary Treasury Yield Curve By Cathy Roy, CFA Chief Investment Officer, Fixed Income Calvert Investment Management, Inc. Inflation data released this week came in more benign than expected. The producer Source: Calvert Investment Management, Inc. price index (PPI) fell a full percentage point as slowing global growth tempered demand for The Week Ahead: raw materials. Consumer prices, as measured Monday, June 18: Housing Market Index figures by the CPI index, declined 0.3%, which was the reported largest drop since late 2008. Jobless claims Tuesday, June 19: Housing Starts data released also unexpectedly rose by 6,000 to 386,000 for Wednesday, June 20: FOMC Meeting the week ended June 9. Friday’s release of the Announcement and Forecasts issued, FOMC Empire State Manufacturing Survey — which Chairman’s Press Conference takes place, EIA measures manufacturing activity in New York Petroleum Status Report released State — showed a disappointing drop to a Thursday, June 21: Existing Home Sales reported, seven-month low. Taken together, the week’s Philadelphia Fed Survey released economic data releases suggest the Federal Reserve has the room to roll out another This commentary represents the opinions of its authors as of round of quantitative easing. 6/15/12 and may change based on market and other conditions. Their opinions are not intended to forecast future events, guarantee future results, or serve as investment Treasury yields were mixed week over week. advice. The two- and 10-year benchmark yields moved up two and down six basis points, Accounts managed by Calvert Investment Management, Inc. may or may not invest in, and Calvert is not recommending respectively, to 0.29% and 1.58% by midday any action on, any companies listed. Friday. Credit spreads were largely unchanged, with the Barclays US Corporate High Yield The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this Index reporting average spreads at 662 basis information cannot be guaranteed. Neither Calvert points over comparable Treasury yields. Investment Management, Inc. nor its information providers are responsible for any damages or losses arising from any use Spain’s mounting banking problems of this information. compelled the government to seek a €100 Calvert Investment Management, Inc. billion bailout on June 9. Despite the aid, 4550 Montgomery Avenue, Bethesda, MD 20814 Moody’s cut the country’s credit rating by (CIO061512) three levels to Baa3. Spanish yield’s soared back up toward historic highs with the 10- year bond hitting 6.87%. This Sunday’s election in Greece will also set the tone for whether Greece exits the euro. European central banks have tried to calm markets ahead of the election by confirming their ability, and willingness, to inject any needed liquidity into the markets.
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