Monday, March 4, 2013
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With not much on the domestic economic calendar, stocks will
likely take a pause in today's trading session ahead of the
all-important labor market reading later this week. New measures
announced by the Chinese government to cool off speculative
excesses in that country's property market could also be a source
of concern for investors.
Weakness in the Chinese property market would mean lower demand
for a host of commodities throughout the global supply chain.
Questions about Italy and the broader Euro-zone also remain
prominent on an otherwise slow news day.
Notwithstanding the less-than-reassuring revision to Q4 GDP last
week, the overall tone of recent economic data has largely been
favorable. Consumer confidence has been improving, vehicle sales
remained robust, and even the factory sector appears to be
showing signs of renewed vigor.
The manufacturing ISM index came in significantly better than
expected last week, reaching 54.2 in February from 53.1 in
January and 50.2 in December. The service sector ISM index coming
out this week is expected to corroborate that trend, particularly
given the positive momentum on the housing side.
On the flip side, it isn't clear at this stage the extent of
negative impact of the payroll tax hike and the recent uptrend in
gasoline prices. Household incomes were significantly weaker in
January as a result, though spending levels didn't seem to be
overly affected. But anecdotal evidence from retailers like
) and others indicate that spending may be at risk of
decelerating from the fourth quarter's level.
That could be a weak spot for the economy, particularly following
the onset of government spending cuts as a result of the
sequester, which went into effect at the end of last week.
Improvement in the labor market could potentially offset the
headwinds from higher taxes and gasoline prices. Last week's
Jobless Claims data was very positive, but we can't discount the
possibility of the February jobs report being distorted by the
Northeast snowstorm that hit the week before the survey week.
On the European front, Italy's fractured electoral mandate and
problems with using the Euro-zone's permanent bailout fund, the
European Stability Mechanism or ESM, to inject capital into
struggling banks have brought back fears that the region's
problems are far from over. Last year's agreement to use the ESM
for direct injections into banks was heralded as key to breaking
the vicious cycle between weak banks and their at-risk
But criticism of the move from within Germany prompted the Angela
Merkel government to back-pedal from the commitments. Other
northern European countries have had second thoughts about
endangering their tax-payer money on riskier bailouts, as well.
With Germany going to polls later this fall, the issue is
unlikely to get resolved along the lines of last year's
agreement, meaning that direct recapitalizations of struggling
countries will remain only a dream.
Director of Research