@ Wall Street
US economic data managed to push the Eurozone debt crisis out of the headlines for the first time in several weeks. The results were largely mixed, with better housing, initial claims, and consumer sentiment data offsetting shaky income and consumption numbers. Meanwhile, House Republicans caved into Senate and Obama Administration demands to sign onto a two-month extension of the payroll tax cut, emergency unemployment benefits, and ?Doc Fix? for Medicare, thus offering markets and consumers a holiday reprieve from unwanted fiscal contraction. But the reprieve is only temporary, as Democrats and Republicans will revisit this fight in another two months.
This may be a decent way to end an otherwise frustrating year. But at the risk of playing Scrooge, it is worth remembering the ghosts of Christmas Past. The backdrop is eerily reminiscent of late-2010 when Congress first agreed to the payroll tax holiday, throwing a lifeline to the economy, while economic indicators showed substantial improvement. Then, market expectations for the recovery became inflated as stocks surged and bond yields pushed above 3%. But stocks and yields came crashing down when oil price shocks, the Japanese tsunami, and debt-ceiling debates pushed us dangerously close to a double-dip recession. Now, markets are reacting positively but cautiously, hopefully keeping expectations in check. The risk of an overshoot and subsequent correction triggered by some unforeseen shock is always in the cards. This will continue to be a sub-par and uneven recovery.
For the week, the S&P500 and Dow each gained about 3%, undoing last week?s losses. Bond prices fell on improved economic prospects, sending the 10-year Treasury yield almost 15 bps higher to 2.02%. The yield curve steepened by 12 bps. Credit spreads narrowed for AAA debt, but widened a bit for BAA debt. Oil prices rose, with West Texas ending the week just shy of the $100 mark. The dollar was steady against the euro, due to a lack of developments on the debt situation, fell against the pound and Canadian dollar, and gained against the yen.
Equity markets have one last chance this coming week to end the year in the black. Unexpected developments on the Eurozone debt front notwithstanding, there may be little to sway markets one way or the other. The fiscal 2012 budget and payroll tax cut extension have been filed away, leaving little business for Congress prior to New Years ? a definite plus at this point. The shortened holiday week brings data on home prices and consumer confidence. Year-on-year declines in the S&P/Case-Shiller Home Price Index are expected to narrow to -3.4%, though this incorporates a -0.7% monthly decline in the seasonally adjusted number. The Conference Board?s Consumer Confidence Index should show substantial improvement thanks to improved jobs prospects and lower gas prices.
