Ahead of Wall Street - August 23, 2012

Thursday, August 23, 2012

The market is justifiably double minded about the course of Fed policy in the coming days. Wednesday’s minutes of the Fed’s last meeting, which took place before a number of key economic reports showed renewed strength, clearly show bias towards more monetary easing. The negative drag from global economic slowdown, as highlighted by soft manufacturing readings from China and the Euro-zone today, further confirms that course of action. But the recent improvement in U.S. economic indicators could mean that the central bank could hold off on doing a full fledged bond purchase program. The focus will now shift to the Fed’s Jackson Hole huddle later this month, pronouncements from which will be closely watched for signs of the central bank’s next course of action.

Today’s flash purchasing managers index (PMI) readings for China and the Euro-zone provide further confirmation of the global economic slowdown. The weakness in Germany is particularly worrisome as it could potentially reduce its ability and willingness to do the heavy lifting needed to stabilize the region’s faltering financial health. This soft international backdrop has contributed to expectations that central banks, including the U.S. Fed, would come out with more accommodative policies.

Minutes of the Fed’s last meeting confirm that the central bank was thinking along those lines as well. But that meeting on July 31/August 1 was followed by a few stronger looking economic data points, with the July non-farm payroll and Retail Sales readings reversing the preceding the three months of negative trend. This morning’s not-so-bad Jobless Claims data is also along the same lines. This could mean that the Fed does not need to rush a new bond purchase program to juice up economic growth. And this lack of clarity on the course of Fed policy in the coming days will likely be the key hurdle for stocks to make any decisive move in either direction.

On the earnings front, Big Lots (BIG - Analyst Report) came short of expectations and guided lower, while results from Hormel Foods (HRL - Analyst Report) were on the positive side. We will have results from Autodesk (ADSK - Analyst Report) and Salesforce.com (CRM - Analyst Report) after the close today.

Sheraz Mian
Director of Research