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Ahead of Wall Street

Thursday, June 13, 2013

The negative momentum from the last few trading sessions will likely remain in place in today’s stock market action as well, with overnight activity in the Asian and European markets overwhelmingly to the down side. The situation is particularly dire in Japan where the Nikkei index has now pulled back more than 20% from its peak last month. The primary driver of this global market tumult is the uncertain outlook for the Fed’s QE program, which is pushing interest rates higher and stock  prices lower.

On the data front, this morning’s Jobless Claims and Retail Sales numbers do little to temper the ‘Tamper’ narrative, with both reports firmly in the positive territory. The Retail Sales report was particularly strong, even though consensus expectations were looking for a strong rebound from the prior month’s level.

The outlook for consumer spending has been holding up very nicely, belying expectations from a few months back that this year’s tax law changes and furloughs resulting from budget sequester would weigh on consumer spending. But the steadily improving jobs market appears to be more than offsetting those headwinds and boosting consumer confidence. This morning’s better than expected initial Jobless Claims data further confirms the favorable labor market backdrop.

But despite the U.S. consumer’s resilience, spending is nevertheless expected to be down in the second quarter from the first quarter’s +3.4% level. As a result, GDP growth in the June quarter is expected to be down from the first quarter’s +2.4% growth pace. This slowdown - a result of the sequester and other fiscal tightening this year – is already factored into the Fed’s and market’s estimates. The expectation is that these negative effects wear off in the third quarter and beyond, pushing economic growth back towards the +3% level towards the end of the year.

This morning’s Retail Sales and Jobless Claims data show that the ground reality may actually be a tad bit better than this outlook. This is good news for the economy, but perhaps not so reassuring for those fearful of the ‘Taper’ talk.

Sheraz Mian
Director of Research

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