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VIDEOWeek Kicks Off With Investor Worry
By
Jack Lavery Jan 26, 2010 8:10 am
China's monetary policy, Obama's talk of bank regulation, and Bernanke's confirmation ignite uncertainty.
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January 20 through January 22 was a short period of time. Yet, in those three trading sessions the Dow Jones Industrial Average dropped 552.45 points, a 5.2% decline. That’s the largest relative decline in stock prices since March 2009, just prior to the bear-market bottom. Corporate bonds faltered as well.
Three concerns have amplified investor uncertainty. China has made preliminary monetary policy moves that suggest a directional tightening. The Obama administration has talked of tougher regulation of banks, both in terms of constraining bank size and risk taking. And increased opposition of Federal Reserve Chairman Ben Bernanke’s confirmation for a second term has arisen in the Senate.
China’s policy moves are to contain the unsustainable growth in bank lending (which doubled in 2009), a troubling escalation of inflation in December, and surging prices in real estate. I see the policy moves as constructive in both managing massive flows of liquidity into China and in seeking to prevent an overheating economy.
The Obama administration talk of Wall Street reform is, in part, political theatre and doesn't suggest knee-jerk implementation of specific regulatory change. Some regard this as capitalism versus Big Government, a multi-year debate. My firm sees Paul Volcker getting some of Mr. Obama’s ear as a positive. And, we see the results of the Massachusetts runoff election to succeed the late Senator Ted Kennedy as stunning, and as evidence of the checks and balances so prudently envisioned by the architects of our Constitution. It is constructive that President Barack Obama now wants a bi-partisan fiscal commission to address US fiscal imbalances with constraints on federal spending as part of the solution. Protectionist policy is, however, wrong and harmful to growth.
As for Bernanke, it is our assessment that he'll be reconfirmed as Fed Chairman. President Obama has secured the overall votes to get this done. This will remove an uncertainty overhanging the market. Investors have also been focused on whether or not the Fed’s program of purchasing mortgage-backed securities will end on March 31 as scheduled. Chairman Bernanke won't jeopardize the sustainability of the economic recovery, but he may underscore prudence in curtailing an area of governmental largesse.
Economic Indicators in the Week Ahead:
Tuesday, 9 a.m. November Case-Shiller Home Price Index
The Case-Shiller Home Price Index for the 20 largest metro areas likely advanced 0.4% in November. This would reduce the year-over-year measure of home price deflation to 5.0%, in line with consensus, and less than the 7.3% year-over-year decline in the October data. Foreclosures will act to keep downside pressure on home prices. But, the Mortgage Bankers Association mortgage application index rose 9.1% in the week ended January 15, atop a 14.3% increase the prior week. This suggests renewed strength in home sales going forward, providing a demand-side limitation on home prices.
Tuesday, 10 a.m. January Consumer Confidence We believe the Conference Board Consumer Confidence Index will rise to 55.0 in January, stronger than consensus expectations. This serves to reinforce the Reuters/University of Michigan preliminary January reading of Consumer Sentiment, which was higher than December.
Wednesday, 10 a.m. December New Home Sales
New home sales likely rose 2.8% in December to 365,000 units at an annual rate, up from 355,000 in November. Our December expectation is below the market consensus. The National Association of Home Builders has had subdued readings in builder confidence re sales expectations. Foreclosures and declines in existing home prices suggest incremental builder concessions to stimulate new home sales. While the inventory of unsold new homes has improved, i.e. declined, the number of months from completion to final sale is nearly 14 months, high by historical standards.
Thursday, 8:30 a.m. December Durable Goods Orders
Durable goods orders likely rose 1.5% in December, stronger than the 0.2% November increase, but less than consensus expectations of a 2.0% rise. A firming in aircraft orders contributes to the December rise. Non-defense capital goods orders excluding aircraft increased by about 1.3% last month, following a 2.2% increase in November.
Thursday, 8:30 a.m. Weekly Jobless Claims
In the week ending January 23, initial jobless claims likely dropped to 435,000, following the increase of the prior week to 482,000. The Labor Department attributes the prior weekly jump to an administrative backlog in claims relating to staffing at state unemployment offices. Continuing claims, reported with a one-week lag, likely fell, but that's due to the number of long-term unemployed exhausting state benefits. The extended federal benefits program is swelling.
Thursday, 8:30 a.m. December Chicago Fed NAI
We see the Chicago Fed National Activity Index in December remaining flat with the November reading.
Friday, 8:30 a.m. Fourth Quarter Real GDP
We expect the “Advance” report from the Bureau of Economic Analysis on real GDP in the fourth quarter of 2009 to show an annualized growth of 5.0% over the third quarter, which grew at an annual pace of 2.2% over the second quarter of 2009. Our expectation of the fourth-quarter real GDP is stronger than the consensus forecast of a 4.5% annualized rate of advance. The gain in the fourth quarter of 2009 is, however, due principally to a dramatically reduced rate of inventory liquidation. Real final demand grew about 1.5% annualized with the consumer, residential investment, exports, and federal government spending contributing to growth, while commercial real estate investment was the principal drag. Inflation, as measured by the GDP deflator, likely rose 0.8%, slower than the consensus call of 1.3%.
Friday, 8:30 a.m. Fourth-Quarter Employment Cost Index
We expect the employment cost index to be up 0.4% quarter-over-quarter in the final quarter of 2009, and up only 1.4% year-over-year. This is a broad measure of labor costs, incorporating wages and salaries and employer-paid benefit costs. Given the tremendous slack in the labor market, we see employment costs under very little upward pressure in 2010.
Friday, 9:45 a.m. January Purchasing Managers Index
We see the Chicago Purchasing Managers Association as reporting the January PMI at 58.0. While down from the December level of 58.7, our expectation is above the consensus forecast of 57.2. The new orders component is likely to reach 66.0 in January from 64.4 in December.
Friday, 10 a.m. January Consumer Sentiment
The final January report from the Reuters/University of Michigan Index of Consumer Sentiment is likely to be unchanged at 72.8 as in the preliminary January report, slightly above the December level of 72.5.
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No positions in stocks mentioned.
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