U.S. and global equity markets spiraled downwards last week in the grip of an apparent death wish. The radical shift to risk aversion in the past several weeks, ostensibly due to escalating concerns about sovereign debt issues in Europe, pushed down commodity prices and benchmark bond yields to levels that have not been seen in months, while the U.S. dollar was sent soaring.
The silver lining to this latest convulsion in the financial markets is that any residual risks of inflation in the U.S. have been fully annihilated for the near future. The FOMC has no reason to flinch from its current stance on monetary policy—dissenters will be quickly dismissed as tilters at phantom windmills.
Interest rates will remain at exceptionally low levels for some time, and 30-year conventional mortgage rates are now in the process of moving back down to near 4.8%, close to the record lows that we saw in 2009.
The big question is whether the real economy can withstand this latest gyration in financial markets without serious damage to its momentum.
Indicators next week largely pre-date recent events and will not shed too much light on this issue. The December trade balance is expected to widen on an inventory-driven surge in imports, while January retail sales should eke out a small but still respectable 0.2% gain. However, consumer confidence is expected to take a negative hit in early February.
KEY U.S. DATA RELEASES THIS WEEK
Wednesday, February 10 – Trade Balance (Dec.)
- IHS Global Insight: -$38.1 Billion
- Consensus: -$35.5 Billion
- Last Actual: -$36.4 Billion (Nov.)
What to Look For
- The trade deficit likely widened to $38.1 billion in December, from $36.4 billion in November.
Implications
We expect export and import volumes both to grow, but that imports will rise more than exports, as the sharp U.S. inventory correction pulls in both finished goods and raw materials from overseas. Foreign trade was a plus for GDP growth in the fourth quarter, but will probably be a drag on growth in the first quarter.
Thursday, February 11 – Retail Sales (Jan.)
Total
- IHS Global Insight: +0.2%
- Consensus: +0.3%
- Last Actual: -0.3% (Dec.)
Less Autos
- IHS Global Insight: +0.6%
- Consensus: +0.4%
- Last Actual: -0.2% (Dec.)
What to Look For
- Retail sales increased an estimated 0.2% in January; excluding motor vehicle dealers, the gain was a more impressive 0.6%.
Implications
Chain-store sales registered a moderate gain in January, with notable strength at apparel and high-end department stores. Rising gasoline prices (up nearly 4% in January) should inflate service station sales. Automotive sales are expected to decline, however, since Toyota temporarily suspended sales of eight models with sudden-acceleration problems. Unit sales of light vehicles fell from an annual rate of 11.2 million in December to 10.8 million in January.
Friday, February 12 – Michigan Consumer Sentiment Index (Preliminary Feb.)
- IHS Global Insight: 73.0
- Consensus: 75.0
- Last Actual: 74.4 (Final Jan.)
What to Look For
- The Reuters/University of Michigan Index of Consumer Sentiment is expected to decrease from 74.4 in January to 73.0 in early February, a milder setback than typically occurs in February.
Implications
The index hit its cyclical low of 56.3 last February and has fluctuated in the 65–75 range since last April. While consumers are gaining confidence in the nation's economic recovery, very few expect an improvement in their personal finances in the year ahead. With employment stabilizing and real incomes gradually rising, we expect that real consumer spending will increase at a 2.5% annual rate in the first quarter, up slightly from 2.0% growth in the fourth quarter of 2009. The latest gyrations in the financial markets will also be a damper.
