Friday, March 30, 2012

Stocks will likely end the first quarter of 2012 on a positive note, given the overall favorable news flow this morning. We got a better than expected read on consumer spending in the U.S and reports out of Europe indicate the broad outlines of an agreement on the permanent bailout fund.

The monthly Personal Income & Outlays report showed that both Personal Incomes and spending grew at better than expected rates in February. Consumer spending increased at a 0.8% pace, compared to January’s 0.4% growth pace. The January gain was revised upwards from the original 0.2% pace.

Since consumer spending accounts for more than two-thirds of the GDP, this morning’s favorable consumption data will likely prompt positive revisions to current growth expectations of about 2% for the first quarter. This is particularly welcome given lack of positive revision in Thursdays final read on fourth quarter 2011 GDP. The Personal Income component of today’s report showed a 0.2% increase, roughly in-line with expectations. Income gains have been fairly modest lately, despite the strong recent payroll gains. As a result, the personal savings rate has been coming down, reaching its lowest level in more than two years to 3.7% in February from 4.3% in January.

European officials have agreed on the size and shape of the permanent bailout fund to serve as a financial firewall for the region. The size of the fund, however, falls short of the earlier €1 Trillion expectation, largely due to objections by Germany. This may cause doubts in the minds of many about the fund’s adequacy, but it is nevertheless a net positive for union. The European Stability Mechanism (ESM), the fund’s official name, will have a lending capacity €700 billion, including existing loans. This fund is expected to come into existence in July, but remain distinct from the existing temporary bailout fund, called the European Financial Stability Facility (EFSF), which will remain operational for another year after the permanent facility comes into existence. The decision on the permanent bailout facility has come at a time of increased market spotlight on Spanish economy. Yields on Spanish government bonds have been trending back up over the last few days as the newly elected government’s plans to institute greater austerity is facing labor market resistance.

In corporate news, the focus will be on Research In Motion ( ) , the BlackBerry maker, which missed expectations in quarterly results after the close on Thursday. Significantly, the company did not provide any guidance for the coming year, spotlighting the lack of visibility on the company’s prospects in a challenging competitive environment. In other news, Finish Line ( FINL - Snapshot Report ) , the athletic footwear retailer, came out with better than expected quarter results, but guided lower.

Sheraz Mian
Director of Research