Ahead of Wall Street - November 23, 2012

Friday, November 23, 2012

Positive looking news out of China and Europe adds to favorable market sentiment in today’s abbreviated trading session as the holiday shopping season gets underway with enticing Black Friday deals. Trading volumes will likely be thin today, but low volumes tend to exaggerate volatility as well.

Holiday sales are expected to be up a little over 4% this year compared to the roughly 5.5% gains last year, according to a retail trade body. This forecast doesn’t seem to be in-sync with the overall better looking economic backdrop this year compared to last year.

Unemployment is down, consumer confidence is up, household balance sheets are in better shape and there may even be some wealth-effect from the improving housing sector this year. We have heard about the uncertain ‘Fiscal Cliff’ situation weighing on business confidence, but it hasn’t showed up in consumer confidence measures which remain at multi-year highs. Perhaps the lack of pricing power at the retail level accounts for the lower ‘nominal’ growth rate this year compared to last year. That said, it will pay to keep an eye on Wal-Mart (WMT), Target (TGT - Analyst Report), Best Buy (BBY - Analyst Report), and other retailers to gauge how this shopping season is holding up.

Beyond the U.S. shores, we have better than expected business confidence numbers from Germany and a positive private-sector reading on China’s manufacturing sector. Germany’s ifo Institute business confidence index for November came in at 101.4, compared to October’s 100 reading and expectations of a drop to 99.5. This is positive as it runs counter to growing fears that economic distress in the Euro-zone’s periphery will drag down Germany with it. We also have improved business confidence data out of France and retail sales numbers out of Italy today.

The news out China provides further evidence that the country’s factory sector may be turning around. The preliminary Purchasing Managers Index (PMI) for November from HSBC Bank (HBC) came in at 50.4, the first reading above ‘50’ in 13 months. The preliminary November reading compares to October’s final reading of 49.5.

The HSBC measure has consistently been showing weakness in the country’s manufacturing sector even as the ‘official’ PMI measure has been coming out with more resilience. But even the ‘official’ PMI measure dipped below the ‘50’ mark in August and September this
year. Questions about China’s growth outlook have been a key source of uncertainty about the global economic outlook. Improved visibility on that front will be a net positive, though we will have to wait for more consistent data to get comfortable with the China situation.

Sheraz Mian
Director of Research