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Ahead of Wall Street - July 31, 2012

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Tuesday, July 31, 2012

All eyes are on the U.S. Federal Reserve and the European Central Bank as the two critical central banks hold their regular scheduled meetings this week. The Fed’s two-day meeting starts today and the official statement comes out Wednesday afternoon, ahead of Friday’s key July jobs report. The consensus expectation seems to be that the Fed will not announce anything new on Wednesday, leaving any major policy changes to the September meeting.

But pressure will be high on Mario Draghi, the ECB president, to follow through on his ‘whatever it takes’ statement from last week. Mr. Draghi’s statement has raised hopes that the ECB will start purchasing Spanish (and Italian) government bonds whose rising yields lately have stoked fears that the country may need a bailout of its own. But Mr. Draghi heads a divided house, where Germany remains opposed to any such move, making it difficult to reconcile Germany’s concerns with Spain’s needs and the market’s demands.
But beyond what the Fed and the ECB may or may not do this week is the more fundamental question of whether monetary policy tools are even relevant to the issues facing these two key economies. The answer is far from clear on that count, particularly with respect to the Fed who has done more than any other major central bank to do its job. But with election-year politics making it difficult to address the core fiscal issues confronting the U.S economy, the Fed may decide it preferable to be seen to be ‘doing something’.

Many serious market watchers even remain of the opinion that the economy’s condition is not precarious enough to warrant fresh Fed support. They point to last week’s 1.5% GDP growth rate in the second quarter and expectations of 100K-plus jobs in Friday’s Jobs report as evidence in support of this claim. This morning’s June Personal income & Outlays reading would also fall in that category. That may be so, but when you combine the loss of momentum in the U.S. economy with the problems in Europe and the issues in China, we have an almost global synchronized global slowdown that may still have quite some ways to further down.
We are clearly seeing the impact of this global slowdown in corporate results this earnings season, with companies finding it difficult to achieve top-line gains. While about two-thirds of the companies were able to beat earnings expectations – roughly in-line with recent quarters, a far weaker percentage of about 38% are able to come ahead of revenue expectations. Even many among these ‘revenue beaters’ are guiding towards weaker times ahead. The trend is widespread across different sectors/industries and present in this morning’s basket of results from Pfizer (PFE - Free Report) ), Coach ), and Goodyear Tire (GT - Free Report) ).
Sheraz Mian
Director of Research


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