Tuesday, December 11, 2012
The trade deficit numbers came in-line with expectations this morning and the two-day FOMC meeting gets underway today. Expectations remain high that the Fed will come out with a new bond-purchase program to replace the expiring ‘Operation Twist.’ Reassuringly, the ‘Fiscal Cliff’ negotiations are reportedly making progress, though both sides are keeping the details private at this stage.
And Italy’s political uncertainties following the weekend resignation announcement of Mario Monti and the resulting uptrend in its bond yields do not appear to be spreading to other countries at this stage. Stocks may not do much due to the ‘Cliff’ drag, but the bias should be modestly to the upside.
Stocks will likely shrug off today’s in-line October trade balance numbers, but the persistent deceleration in export growth should be worrisome. Not only have the export growth numbers been on a downtrend lately, but the export orders sub-index of the manufacturing ISM index has been in contracting mode (below the ‘50’ level) as well since summer. The global economic slowdown appears to be the primary driver of this trend.
Export growth has been a key contributor to GDP growth since the start of the recovery in 2009 and its weakness means that other areas need to step up to make up for the growth shortfall. The housing recovery would have been a nice add-on to the economy’s growth trajectory, but the weakness in exports as well as in corporate capital spending means that a lot will be riding on consumer spending.
And while consumer spending appears to be holding up nicely, we may not an improvement in the absence a noticeable uptick in the labor market. Bottom line: while everybody expects the economy to start ramping up beyond the next couple of quarters, it isn’t clear where the growth will come from.
In corporate news, we got a better than expected earnings report from Dollar General (GD) this morning and Texas Instruments (TXN) modestly raised its earnings outlook for the fourth quarter on Monday. In other news, the U.S. Treasury will entirely end its equity stake in American International Group (AIG) by selling its remaining shares in the insurer. While the Treasury’s selling price is at a modest discount to AIG’s closing price on Monday, the final sale will mean that the government’s 2008 bailout generated a net positive return.
Director of Research
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