Thursday, February 28, 2013
Federal Reserve Chairman Ben Bernanke’s assurances over the last two days have eased concerns about the Fed’s policy, helping push stocks back on the upward trajectory. This goes on to reconfirm for us how central the Fed’s stance is to the stock market’s momentum.
We saw the rally wobble as doubts about the Fed’s QE program emerged, but the momentum appears to have been restored following Bernanke’s soothing words, even though fiscal policy is heading towards the onset of austerity. This morning’s positive Jobless Claims and GDP reports should add to the overall favorable momentum.
The GDP revision was a bit of a disappointment, with the ‘headline’ growth rate moving back in the positive territory but the report’s internals weakening a bit. But the Jobless Claims data came in significantly better than expected, potentially indicating a positive jobs number in next week’s non-farm payroll report.
Initial claims were down 22K to 344K from 366K. The 4-week average dropped from 362K to 355K, lower than the level at the end of 2012. We won’t get the February non-farm payroll data till next week, but the numbers will likely be distorted by the East Coast snow storms. The trend has been in the 150K to 160K monthly pace over the last couple of months and the recent movement Jobless Claims data indicates that we could potentially a better number in non-farm payrolls next week.
The government’s advanced read on fourth quarter GDP a month back came as a shocker when it showed the U.S. economy shrinking by -0.1%. Today’s second read on fourth quarter GDP reversed that – showing +0.1% growth vs. expectations of +0.5%. The internals were a bit on the weaker side, but not by enough to significantly change the overall story about the U.S. economy.
Consumer spending went down a bit, while business spending went up. Business inventories and government spending, the major areas that gave us the negative growth rate a month back, turned out to be a tad bit weaker on the second look.
The bottom line on the GDP front is that the private sector of the U.S. economy is expanding at a roughly 2% annualized pace, offset by weakness on the government side. With government austerity expected to become the norm going forward with the sequester getting underway, we should perhaps get used this trend for the coming quarters even though the ‘headline’ growth rate will likely be better than what we saw in the fourth quarter.
With the Fed no longer a burning concern, the sequester essentially a non-issue and the internals of the economy good enough (not great, but not bad either), the market has all that it needs to make another go at new all-time highs. We will probably have to wait for tomorrow’s ISM and next week’s jobs reports before we can expect a major upward thrust in the market. But this market has surprised in the past and could very well do that again.
Director of Research