Whatever the optimism and positive signals amidst improved job market, better housing sector and good holiday retail sales brought the New Year moods cheerful seems to be fading since two weeks had passed. This is because of the below than expected results and outlook from financial major JPMorgan Chase's fourth quarter numbers besides increased jobless claims.
As if these were not enough, late on Friday Standard & Poor's has downgraded France, Austria, Malta, Slovakia and Slovenia by a notch on its long-term ratings, whereas Cyprus, Italy, Portugal and Spain's long-term ratings were reduced by two notches. However, the rating agency spared Germany, Belgium, Estonia, Finland, Ireland, Netherlands and Luxembourg.
S&P reviewed 16 countries and provided negative outlooks to 14 countries of them and the two nations spared was Germany and Slovakia. This indicated that the actions taken so far by the leaders of the Euro Zone failed to address the size and scope of the financial problems prevailing in the region, the rating agency indicated. No doubt, the global markets will likely to react negatively when the market resumes next week. In fact, the U.S. and European market seemed to have been expecting such negative sentiments from the rating agency going by their lackluster trading and weak sentiments witnessed on Friday's trading.
The second week started off with Alcoa reporting a loss that was slightly wider than expected, but achieved better that expected revenues for the fourth quarter amidst melting aluminum prices. Their capacity reduction and positive outlook for 2012 offered some solace in the beginning of the week. But towards the end of the week, JPMorgan's fourth quarter earnings numbers failed to keep up any positive momentum and indicted what is in store from similar companies in the financial space.
The fact that consumer credit surged by $20.4 billion in November did provide positive mood to warrant some analysts to comment about evidence of consumes once again turning towards taking additional debt burden. But Wells Fargo, in its research note to its clients, indicated its fear that the real driver has been a lack of real income growth and increased prices for necessities, specifically food and gasoline, have forced consumers to cut down savings and take on additional debt.
There is every possibility that consumer spending will slow down in the first half of 2012 weighed down by lack of real income growth and fall in the saving rate. The Government's latest data on retail sales suggest that moderation is already taking place. The Government's data on retail sales indicated a mere 10 basis points improvements for December on top of a 40 basis points rise for November. Fears have already been raised of a tough task ahead for the retailers to post even modest gains in the first quarter.
Wells Fargo believes that International trade and inventories indicate that growth was more modest during the fourth quarter and could disprove claims of accelerating economic recovery. This has forced analysts of Wells Fargo to cut down fourth quarter real GDP growth to 3.4 percent for the U.S.
The week ahead will provide further indication as to where the U.S. economic activities are heading. Industrial production slipped 20 basis points in November falling shy of consensus estimation of a modest gain due to auto production's 3.4 percent fall. The ISM index's positive December and factory sentiment measures are expected to see industrial production witness an increase in December from last year. Wells Fargo economists expect 0.5 percent month-over-month industrial production growth. The official report will be announced on Wednesday.
On the housing data, which is expected on Thursday, December figures will be keenly watched as it comes on the heels of a better than expected November housing starts driven by strong starts and permits in multifamily units. While November housing starts was 685,000 for November, Wells Fargo expects 660,000 for December whereas consensus remains t 685,000.
Wholesales prices witnessed upside more than twice during the last couple of years as much as consumer prices. The Producer Price Index averaged 5.0 percent year-on-year for the period between November 2009 and 2011, while Consumer Price Index was just 2.4 percent during the same period. Wells Fargo expects this to be 2.9 percent compared to previous figure of 3.4 percent and consensus estimate of 3.1 percent. The official announcement will come on Friday.
The market must naturally be looking for positive signals from these data to undo any negative effect of the previous week. Positive earnings results from corporate bigwigs such as Citigroup (C), eBay would also lift the sentiments. On the other hand, any negative signs from these counts will result in further deteriorating of marketing sentiments that could potentially drag down the market barometer. European Union's move will also holds key to the direction, especially after S&P downgraded its member countries.
