Tuesday, February 28, 2012
This morning’s soft Durable Goods data will likely give investors no encouragement to cross the major psychological barrier that they have been struggling with in recent days. We also e data about home prices and consumer confidence on tap for release a little later, but the overall trading action today will likely be not much different from the tentativeness that we have been seeing lately. With respect to Europe, all eyes are on the European Central Bank’s second bank liquidity operation, scheduled for tomorrow. The German parliament passed the Greek bailout on Monday and we have a fairly successful government bond auction from Italy this morning, rounding out a fairly benign Euro-zone backdrop for today’s market action.
In today’s major domestic economic releases, the January Durable Goods Orders report came in significantly weaker than expected, though the prior month’s numbers were modestly revised higher. ‘Headline’ Durable Goods Orders dropped a greater than expected 4% in January, compared to the strong gains in the December reading when orders increased 3.2%. The nondefense capital goods orders, which strips out defense and aircraft orders given their inherent ‘lumpiness’ on a month-to-month basis, was down 3.4% in January, after December’s 3.8% gain. The nondefense capital goods series is an excellent proxy for capital expenditure trends in the economy, but I wouldn’t read too much into this month’s ‘softish’ reading because of seasonal factors. This series has a well documented tendency to drop or behave unusually in the first month of the quarter.
On the European front, the market is bracing for Wednesday’s second round of cheap long-term funding program by the European Central Bank (:ECB). The central bank’s first long-term refinancing operation (:LTRO) for €489 billion back in December was instrumental in turning around the sentiment on the Euro-zone situation. Many in the market dubbed the LTRO program as a back-door quantitative easing program along the lines of the Fed’s bond purchase program. There has been a consistent easing of pressure in the government bond markets of Italy and Spain ever since the December operation. The expectation is that Wednesday’s second round of LTRO, expected to be roughly of the same size as the first round, will further consolidate those gains.
On the earnings front, we have better than expected results from AutoZone (AZO) and Hovnanian Enterprises (HOV) this morning. Priceline.com (PCLN) came out with better than expected results after the close on Monday and guided higher for the first quarter.
Director of Research