Ahead of Wall Street - March 1, 2012

Thursday, March 1, 2012

Stocks will have plenty to digest in today’s session, with a host of consequential economic reports on deck. The Jobless Claims and Personal Income & Outlays readings were overall favorable, which should set for a favorable tone at the open. And going by the strong Chicago PMI reading on Wednesday, it is reasonable to expect further gains from the manufacturing ISM survey coming out a little later.

Wednesday’s loss of momentum in the market followed Bernanke’s Congressional testimony that raised doubts in investors’ minds about further quantitative easing action from the Fed. I don’t know why would there be any need for further Fed bond purchases if the economy continues to show the resilience it has been showing lately. But the market appears to expect the Fed to stand behind it irrespective of the strength in the economy. We will hear more from Bernanke today, with the Fed Chairman testifying to the Senate. You can almost guarantee that investors will be sizing up Bernanke’s testimony today to get more color on the odds of further quantitative easing in the days to come.

The Fed watch aside, investors have two broadly positive economic releases this morning in the Jobless Claims and Personal Income & Outlays reports. The monthly Personal Income & Outlays report for January was a tad shy of expectations, but pointed to continued positive improvement in the economy. Wednesday’s favorable revision to the fourth quarter GDP, driven mostly by the Personal Income & Outlays component, is pointing towards positive momentum coming into the first quarter. The income strength is particularly noteworthy, as it is likely reflecting more resilience in the labor market than captured by the official payroll data.

We will get the official February Jobs numbers on Friday next week, but all indicators are pointing towards momentum building in the labor market. This morning’s Jobless Claims data is just the latest in that regard, which will likely get further confirmed by the employment component of today’s ISM report. Initial Jobless Claims came in better than expected last week – down 2K to 351K vs. expectations of a modest rise. The prior week’s tally was modestly revised upwards to 353K from the originally reported 351K. The four-week average, which smoothes out the week-to-week fluctuation, dropped 5.5K to 354K, the lowest level since March 2008. This key data series has been consistently moving favorably in recent weeks, contrary to initial skepticism on the part of some in the market, pointing to a steadily healing U.S. labor market.

In corporate news, we got a 9% dividend hike from Wal-Mart (WMT - Analyst Report) this morning. We are also getting February same-store sales numbers from a host of retailers this morning, with better than expected results from Costco (COST - Analyst Report), Limited Brands (LTD), and Zumez (ZUMZ - Analyst Report). Shares of Clear Channel Outdoor (CCO - Snapshot Report) will be in the spotlight today following the company’s announcement this morning of a special dividend for its Class A and B shares. After the close on Wednesday, we got weaker than expected results from telecom equipment maker Finisar (FNSR) and auctioneer Sotheby’s (BID).

Sheraz Mian
Director of Research