@ Wall Street
The Friday selloff in equity markets following rumors of an impending Eurozone sovereign debt downgrade, reminds us that we?re not out of the woods yet even if news out of Europe has been subdued lately. The biggest concern at the moment is France. The AAA status of core Eurozone members is helping the European Financial Stability Fund to raise the capital it needs to provide bailout funds to weaker members. Without it, the fund's firepower could be compromised. Germany would then be the last line of defense. Despite being put under review last month, German debt isn?t expected to be downgraded.
Meanwhile, fourth quarter growth estimates for the US were shaved this week when it appeared that the US exported less in November than initially thought. At the same time, hopes are rising that the worst of the Eurozone contraction will be contained to that quarter amid signs of stabilization within the economic data. This view was certainly behind the ECB?s decision not to cut its benchmark interest rate below 1% this week after cutting in November and December. Our suspicion, however, is that the Eurozone will suffer further appreciable economic weakness over the early months of 2012, with negative implications for US trade and growth.
On the US data front, results were generally mixed but without any red flags for the recovery. Consumer credit surged in November as consumers racked up credit card debt. In most business cycles, increased credit is a sign of confidence in the recovery, but this time bares the risk that consumers will once again become overextended. Small business optimism improved in January, thanks to a better outlook, but remains subdued. Retail sales underwhelmed expectations in December, as steep discounting was needed to lure customers into stores. The concern is that in the absence of price cuts, spending won?t be as strong going forward. The trade balance widened in November as weak exports combined with an oil-related boost in imports. Consumer sentiment improved more than expected in January for a fifth straight month thanks to better jobs, lower gas prices, and equity market gains.
On the docket for the coming week (beginning January 16), are data on inflation, industrial production, housing starts, and existing home sales. Falling energy prices likely kept the CPI and PPI flat in December with core inflation clocking at just 0.1% in both measures with little to propel it. For industrial production, weather-related declines at utilities will likely mask strength in manufacturing, and keep total output flat for December. Mild weather was likely a plus for December housing starts, but a correction on the multifamily side after last month?s surge should keep total starts relatively flat for the month. Finally, a jump in pending homes sales in November presages an increase in final existing homes sales in December, but the outlook is still highly uncertain.
