MarketView for December 13

 

 

Summary 

  

The major equity indexes fell for a second straight day on Tuesday after the Federal Reserve provided no indication that it was considering any sort of a new stimulus program to offset the effects of the worsening European debt crisis. Though the Fed did leave the door open to further easing next year, as it has done after recent meetings, it gave no indication it was any more inclined to provide new economic stimulus.

 

The Fed left monetary policy on hold and said financial market turbulence posed threats to economic growth. It also characterized the U.S. economy as expanding moderately despite an apparent slowing in global growth, though it added that unemployment remains elevated and housing activity depressed.

 

The disappointment with the Fed came at the tail-end of a trading session that was largely focused on Europe, especially after German Chancellor Angela Merkel rejected any suggestion of raising the limit on Europe's bailout fund.

 

Consumer-related stocks were the worst performers. Shares of Best fell 15.5 percent to $23.73 after the electronics retailer reported a quarterly profit below expectations as bigger discounts squeezed margins.

 

According to a report by the Commerce Department, retail sales rose less than expected in November as a drop in receipts for food and beverages weighed against stronger sales of motor vehicles, tempering expectations of a strong holiday shopping season.

 

Crude oil futures rose in price by more than 2 percent, advancing above $100 a barrel at the session high, with traders citing tension between the West and Iran as a possible trigger.

 

Volume was light with about 7.28 billion shares changing hands on the three major equity exchanges, a number that was below last year's daily average of 8.47 billion shares.

 

Europe Is a Problem Says Fed

 

After the close of its meeting on Tuesday, the Federal Reserve indicated that the turmoil in Europe as being of considerable risk to the economy and left the possibility of additional easing as a future possibility, even as it noted some improvement within the labor market.

 

The central bank characterized the economy as expanding moderately despite an apparent slowing in global growth and said that while there had been "some" improvement in the job market, unemployment remained elevated and housing depressed.

 

"Strains in global financial markets continue to pose significant downside risks to the economic outlook," the Fed said, alluding in a post-meeting statement to pressures stemming from the debt crisis in the euro zone.

 

The Fed's statement, issued after a one-day meeting, was little changed from the announcement it released after its last gathering in early November, and it touched only lightly on apparent improvements in the economy's performance.

 

The Fed offered no new guidance on its evolving communications policy and repeated that it expects inflation to settle at levels at or below those consistent with its price stability mandate.

 

For a second consecutive meeting, Chicago Fed President Charles Evans dissented against holding policy steady, saying he favored additional easing now. However, the Fed pinned uncertainty more squarely on events in Europe. While in November it said risks to the outlook merely included global strains, on Tuesday it linked risks directly to volatility abroad.

 

The Fed has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion in government and mortgage-related bonds in a further attempt to stimulate a robust recovery.

 

Fed officials are divided among those who think high unemployment and sluggish growth require more action and those who view the central bank's already-aggressive efforts as bordering dangerously on an invitation to inflation.

 

Some influential policymakers, including Vice Chair Janet Yellen, have suggested they would be inclined to take additional steps if growth fails to pick up.

 

Changes to the Fed's voting line-up for 2012 will remove three policymakers known to favor a hard line against inflation, with only one such "hawk," Richmond Fed President Jeffrey Lacker, suggesting support for further easing may strengthen in coming months.

 

The Fed's activist approach to pulling the economy out of recession and to buoying a tepid recovery stands in contrast to the European Central Bank, which has been more tentative. The ECB held rates steady until November before delivering two rate cuts as the euro zone began to slide toward economic contraction.

 

Recent economic data point to some improvement. The jobless rate declined 0.4 percentage point to 8.6 percent in November, factory activity has increased and businesses are restocking depleted shelves. Consumer spending also appears reasonably solid, although a softer-than-expected report on November retail sales on Tuesday offered a hint that it could be flagging.

 

There is considerable opinion on the Street that the Fed will take steps to stimulate growth in 2012, first through communications measures that drive home the expectation that interest rates will not rise for a long time, and then through more bond buying.

 

Yellen has said the Fed could reinforce its ultra-accommodative monetary stance by publishing policymakers' forecasts for the path of interest rates. Officials are also debating whether to adopt an explicit target for inflation.

 

The first step would reassure skittish markets that the Fed is not about to tighten policy any time soon. The latter would aim to dispel any doubts about the central bank's commitment to keeping inflation low.

 

Top officials have also remained open to adding bonds to the Fed's already bloated portfolio.

 

Some have said the central bank should resume purchases of mortgage-backed securities to help revive the depressed housing market; others would prefer to stick with purchases of U.S. government debt.

 

Retail Sales Slow

 

Retail sales grew at their slowest pace in five months in November, tempering expectations for a strong holiday shopping season, increasing at a weaker-than-expected 0.2 percent after gaining 0.6 percent in October, a Commerce Department report showed on Tuesday. Relatively strong consumer spending in recent months has helped the United States resist a global slowdown fed by Europe's still menacing debt crisis.

 

A separate report showed business inventories rose in October by the most in five months, pointing to stronger growth as companies restock shelves to meet consumer demand.

 

Meanwhile, November's reduced retail data looked unlikely to rekindle fears of an imminent recession, and Federal Reserve policymakers meeting on Tuesday did not unveil any major policy shifts. The Fed did, however, say financial market turbulence posed a threat to economic growth.

 

There is some opinion that some of the strength in American consumption has come from households saving less, a trend that might not last. Indeed, Tuesday's retail data suggested some of that strength might already be waning.

 

Receipts for motor vehicles and parts fueled the overall increase, rising 0.5 percent. Excluding autos, sales rose just 0.2 percent.

 

One factor weighing on consumers is the substantial drop in household wealth so far this year. Big declines in the stock market during the third quarter led household wealth to contract $2.4 trillion, Fed data showed last week. Weak growth in after-tax incomes has failed to keep up with inflation.

 

In November, sales at food and beverage stores fell 0.2 percent, while receipts at gasoline stations dropped 0.1 percent. Yet, some details within the report were more heartening. Sales outside autos, gasoline and building materials - which correspond most closely with the consumer spending component of the government's gross domestic product report - rose 0.3 percent in November.

 

That led Goldman Sachs to raise its forecast for the pace of fourth-quarter U.S. economic growth by a tenth of a percentage point to 3.5 percent. Also positive for the growth outlook, a survey showed small businesses grew more confident in the economy's future in November, a third straight month of improvement.