Ahead of Wall Street - August 9, 2012

Thursday, August 9, 2012

Central banks remain the primary props behind the all-around air of optimism in the market. And it’s just not the U.S. Federal Reserve that is expected to do its bit to juice up the economic scene, the European Central Bank (ECB) and the People’s Bank of China (PBOC) are equally expected to remain in an activist mode.

This set of expectations is prompting market participants to scrutinize every incoming economic data from a monetary policy perspective. The ECB is battling a different kind of monster, but this morning’s inflation data in China and Jobless Claims data in the U.S. is seen as supportive of further central bank easing.

On the initial Jobless Claims front, we got a better than expected drop of 6K increase in initial claims to 361K (a decline of 4K when combined with revisions to the prior week’s tally), with the 4-week average going down 2.9K to 368.3K. With the auto sector’s seasonal shut-downs now behind us, this is perhaps the ‘cleanest’ jobless claims data that we have seen in the last many weeks. This level of initial Jobless Claims is generally considered consistent monthly payroll gains of 150K to 170K or around the July level we saw last Friday.

With respect to China, this morning’s 1.8% increase in the July CPI is seen as favorable to more easing action by the PBOC. While the July CPI increase was a tad bit higher than expectations, it is nevertheless a deceleration from June’s 2.2% increase and follows increases of 3.6% and 3.4% in April and March, respectively. The deceleration in the Chinese inflation readings gives the country’s monetary and fiscal authorities the space to implement more stimulus measures to improve the economy’s growth outlook.

It is far from clear at this stage whether the recent run of labor market data is consistent with more Fed QE. I think it is not, but this is a minority view as a growing number of economists see the Fed coming out with another round of bond purchases in its September meeting.Macroeconomic Advisors (MA), the economic forecasting firm that we consult with, is now calling for the Fed to come up with a $600 billion to $750 billion QE3 program next month. And they credit the new easing program in their forecasts to add a quarter percentage point to GDP growth and a modest decline in the unemployment rate. But they are hardly alone in this line of thinking; most of the recent stock market gains can be assigned to this Fed outlook.

On the earnings front, we got positive guidance from Brinker International (EAT - Analyst Report), after the restaurant operator came out with better than expected earnings on in-line revenues. Results from Wendy’s (WEN - Analyst Report) were in-line, though North American comps were positive. Kohl’s (KSS - Analyst Report) results were largely inline with expectations, though the retailer’s comps were on the weaker side. We have Nordstrom (JWN - Analyst Report) reporting after the close today.

Sheraz Mian
Director of Research