'Fiscal Cliff' negotiators have reportedly made meaningful
progress over the weekend as the last full week of trading before
the Christmas holidays get underway. While we are a bit light on
the data front today, but the rest of this week brings a number
of top-tier economic and earnings reports. But the focus will
remain on the 'Fiscal Cliff' question.
Housing is a major component of this week's data, with Tuesday
bringing the December homebuilder sentiment index, Wednesday the
November Housing Starts numbers, and Existing Home sales data on
Thursday. The expectation is for Housing Starts to pullback
modestly from the prior month's level, while the homebuilder
sentiment index is expected to be essentially unchanged from the
month earlier level.
Other major reports this week include the November Personal
Income & Outlays and Durable Goods reports on Friday and the
final read on third quarter GDP on Thursday. Expectations for GDP
growth in the fourth quarter have been steadily coming down in
recent weeks and currently stand a little under 1.5%, with the
growth pace not much better in the first quarter of 2013
Expectations for the back half of 2013 are for much higher
growth pace, though it's hard to envision how the momentum will
shift. A Wall Street Journal report today quoting a Dow Jones
Newswires survey shows major Wall Street firms expecting treasury
bond yields to rise in 2013. Most prominent among these major
brokerage firms are the 21 primary dealers, who underwrite
treasury bond sales and deal directly with the Fed.
The median 10-year Treasury bond yield forecast for the
primary dealers is for a roughly 50 basis point rise by the end
of 2013 - from the roughly 1.71% as of Friday's close 2.25% by
the end of the year. Yield on the same security was at 1.88% at
the end of 2011.
This makes perfect sense, for two reasons. First, yields have
been so low for so long that the only direction they should be
moving going forward is - higher. Second, if anyone in the market
has a good understanding of the Treasury bond market, it is most
likely the firms that underwrite the securities - meaning the
The only problem is that the primary dealers had come out with
similar forecasts in 2011 and 2010, but unfortunately things
turned out differently. Maybe the third time is the charm. But
it's not easy for anyone, even the primary dealers, to 'fight the
Fed.' With the Fed committed to adding more than a $1 trillion
worth of treasury and mortgage bonds to its balance sheet in
2013, it is perhaps reasonable to be skeptical of Wall Street's
treasury yield forecast for 2013 as well.
These economic growth questions have a direct bearing on the
corporate earnings outlook for 2013 as well. The fourth quarter
earnings season gets underway this week with
) quarterly report after the close on Tuesday, though we are
still a few weeks away from the 'unofficial' start of the
earnings cycle with
) release on January 8th. Other major reports this week include
Earnings expectations for the fourth quarter have been
steadily coming down over the last three months, with total
earnings expected to be up 1.2% from the same period last year.
This is a sharp drop from the roughly 7% earnings growth expected
just three months ago. But even as expectations for the fourth
quarter have come down, we haven't seen much downward adjustment
to expectations for 2013, which still shows earnings growth rate
of more than 10%.
The same thinking that is looking for the economy and Treasury
yields to start rising in the second half of 2013 appear to also
at play in looking for 10%-plus earnings growth. Maybe it's just
me, but I find it hard to buy into these expectations.
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