Ahead of Wall Street - January 23, 2012

Monday, January 23, 2012

The market appears to be least concerned about Greece’s inability to reach a restructuring deal with its private creditors. The Greek government assured that it did not see its talks collapsing. This, coupled with a successful German bond auction today, should help stocks sustain the positive momentum of the last couple of weeks. We have a relatively quiet day today on the economic and earnings fronts, but the rest of this week brings a host of material reports.

On the economic front this week, we have the Fed meeting and the fourth quarter 2011 GDP report on deck. The Fed is not expected to change its near-zero interest rate policy, but this first meeting of 2012 will usher in a new phase of transparency for the Central Bank. In addition to the customary Fed statement after the meeting and the quarterly Bernanke news conference, this time will bring Fed Funds rate forecasts by the individual Fed districts through 2015.

We will also get when the individual Fed districts see the FOMC starting to raise interest rates again. This is a significant development as it likely will show that the central bank districts expect near-zero interests for longer than the current FOMC policy of through 2013 only.

It will be interesting to see how Treasury yields will respond to this expected disclosure. Will this result in greater flattening of the yield curve, particularly given growing expectations of another round of quantitative easing despite the recent favorable run of economic reports?

The Fed aside, this week also brings the first read on the fourth quarter GDP numbers, with the expectation for the growth rate to be in the 3% range. Short of a significant higher or lower number relative to that expectation, the market will likely not take much note of the release.

Inventory building will be a positive contributor to growth this time around after shaving off more than a percentage point in the third quarter, while personal consumption expenditures likely accelerated from the previous quarter’s 1.7% pace.

It will be interesting to see how businesses spent their money in the quarter as all indicators are pointing to a deceleration on that front. The fourth quarter increase notwithstanding, the consensus expectation is for growth  to moderate in the first quarter of 2012 to the 2% level.

In other economic news, we will get the December Durable Goods and New Home Sales numbers on Thursday. We will also get the weekly Jobless Claims data this Thursday, which experienced a sharp drop last week, reversing the preceding week’s rise. Notwithstanding the complications with seasonal adjustments at this time of the year that most likely lay behind the sharp volatility in this series over the last two weeks, there is no denying the favorable momentum on the labor market front.

Not to forget that we are in the midst of the fourth quarter reporting season. With less than a fifth of the reports already in, the growth numbers are a lot weaker than we have become accustomed to in recent quarters. But there is little surprise in that as expectations had already come down ahead of the reporting season. In fact, the earnings reports thus far -- particularly in the financial sector, which forms the bulk of the early reports -- have been better than expected.

In today’s relatively quite earnings releases, we got roughly in-line earnings from Halliburton ( - Analyst ReportHAL - Analyst Report) on strong top-line gains. In other news, Apache Corp ( - Analyst ReportAPA - Analyst Report), a major oil and natural gas E&P player, is buying privately held Cordillera Energy for $2.85 billion. The deal gives Apache acreage position in the Granite Wash region that straddles the Texas-Oklahoma border. Texas Instruments ( - Analyst ReportTXN - Analyst Report) and CSX Corp ( - Analyst ReportCSX - Analyst Report) report after the close today.

Sheraz Mian
Director of Research

Read the full analyst report on TXN

Read the full analyst report on HAL

Read the full analyst report on CSX

Read the full analyst report on APA