Monday, February 25, 2013

Fed inspired jitters pulled the market down last week, ending the market’s 7-week long positive run. But investors appeared to regain their composure by the week’s end and will be looking for further clarity this week from Bernanke’s testimony in the Senate (on Tuesday) and the House (on Wednesday). We don’t have much on the economic calendar today, but a number of key economic reports this week will shed light on the health of the consumer and factory sectors.

The budget sequester getting underway on Friday will also be of interest, though the market doesn’t seem to be too concerned about the spending cuts. The $85 billion in spending cuts as a result of the sequester will no doubt have a modest impact on GDP growth this year, but the issue may actually be more political than economic. The market’s lack of ‘sequester concern’ is telling us that it may actually be viewing the spending restraint favorably. We will be watching for any fresh developments on the sequester front, but the likely course at this stage seems to be that the spending cuts will take effect on Friday.

Bernanke’s testimony is about the economic outlook, but we can easily envision partisan-tinged leading questions from members about the advisability of the sequester. The market’s focus will be on the Fed chief’s comments and discussion of the ongoing quantitative easing program. Last week’s minutes of the Fed’s January meeting showed a healthy debate within the FOMC about the appropriateness of current policy, making investors concerned that the central bank may change the program earlier than currently expected. I don’t think any changes are imminent at this stage, but given the Fed’s centrality to market’s recent momentum, the concern nevertheless served as a notable speed bump for the market.

This week’s data will give us a better handle on the impact of payroll tax changes on consumer spending. In addition to the January Personal Income & Outlays reading coming out on Friday, we will get the February Consumer Confidence level on Tuesday. We also have a host of major retailers like Target ( TGT - Analyst Report ) , J.C. Penney ( JCP - Analyst Report ) , Kohl’s ( KSS - Analyst Report ) , and Dollar Tree ( DLTR - Snapshot Report ) reporting fourth quarter earnings reports this week, whose forward looking commentary on the state of the consumer will provide further confirmation of the impact of higher gasoline prices, delayed IRS refunds and of course the payroll tax hikes that were at play in the Wal-Mart ( WMT - Analyst Report ) earnings report last week. While Friday’s Personal Income data is expected to show a decline to reflect these headwinds, but it will be interesting to see to what extent consumers are dipping into their savings to offset the income hit.

Sheraz Mian
Director of Research