Moving to the Muddle
The ongoing political and financial turmoil in Europe is likely to draw most of the market’s attention this week. Against that somewhat unsettling backdrop, market participants will digest a relatively busy slate of U.S. economic data for October and November, as well as a full docket of appearances by Federal Reserve (Fed) officials.
With only a scattering of earnings reports and guidance for the third quarter of 2011 remaining, this week’s full slate of economic reports and heavy schedule of Fed speakers will compete with the economic and fiscal turmoil in Europe for the market’s attention. Participants continue to assess what impact a potential recession in Europe and slowdown in emerging markets will have on the United States economy, and when that impact is likely to be felt.
The European summit of late October 2011 produced measures that were clearly a positive and removed the extreme risks in our view. However, details will be slowly forthcoming in the months ahead and implementation risks remain. Delays or disruptions could undermine market confidence and lead to bouts of safe-haven buying of Treasuries. Furthermore, should European economic growth be weaker than expected, investors may deem recently agreed upon safeguards as insufficient and peripheral European government bond weakness may create safe-haven buying of Treasuries.
Looking ahead, developments in Europe will remain a major market driver in the weeks and months ahead, and well into 2012. We believe a financial crisis and accompanying deep global recession erupting from the European debt problems has a small, but not insignificant, chance of taking place. We will continue to monitor the developments and signs of stress in the European banking and sovereign funding markets. But, as Europe muddles along, we believe investors are better served to watch the real-time indicators of economic performance as a guide to market behavior.
This week is a very busy week for U.S. economic data, including reports on:
· Housing: November homebuilders sentiment, October housing starts, third quarter mortgage delinquencies and foreclosures
· Inflation: consumer price index (CPI) and producer price index (PPI) for October
· Manufacturing: industrial production for October, Philly Fed and Empire State Manufacturing indices for November
· The consumer: October retail sales and weekly retail sales for the week ending November 12
In addition, the weekly reading in initial claims for unemployment insurance will be closely watched as this data set in recent weeks has suggested some positive momentum in the labor market.
In addition to the data, there are a number of Fed speakers on tap this week, although Fed Chairman Bernanke is not among them. This week’s Fed speakers lean a bit toward the “dovish” side (Fed officials who favor the full employment side of the Fed’s dual mandate of low inflation and full employment), although some notable “hawks” (Fed officials who favor the low inflation side of the Fed’s dual mandate) are on the schedule as well. We will continue to watch the “center of gravity” at the Fed - Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley - for any shift in tone. Of the three, only Dudley is slated to speak this week. The Fed will release the minutes of the November 1 – 2 Federal Open Market Committee (FOMC) meeting on November 22, and the next Beige Book, a qualitative assessment of business and financial conditions in each of the 12 regional Fed districts, is due out on November 30. The next FOMC meeting is December 13.
We continue to expect the Fed to pursue historically accommodative monetary policy in the period ahead. Even if the economy tracks to the market’s expectations (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecasts for economic growth and the unemployment rate remain more optimistic than the market’s.
_____________________________________________
IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Core CPI is a subset of the total Consumer Price Index (CPI) that excludes the highly volatile food and energy prices. It is released by the Bureau of Labor Statistics around the middle of each month. Compare to Personal Consumption Expenditures (PCE); Core PPI; Producer Price Index (PPI).
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-022964 (Exp. 11/12)
