Market Update

The Week Ahead: Fundamental Outlook for February 8 thru February 12, 2010

This week, from the standpoint of scheduled macroeconomic announcements, there are few major US reports that will probably impact the markets.. At this point, however, I would like to stress the term “scheduled.” Earnings season so far has seemed to have little impact from a broad market perspective as most corporate announcements have been overshadowed by the events of the given day. For example, last Thursday posted a very positive report and that individual stock performed well; however, it was not enough to slow what became a very wide reaching market sell-off. It seems that concern over sovereign debt in countries such as Greece, Portugal and Spain will probably once again be top stories. If some of these fears can abate temporarily, it may give the global equity markets a chance to regain some of their recent losses. On the currency front, the US dollar has taken both the EUR and GBP through some very big technical support levels and if the USD continues to strengthen, it may prove difficult to find much upside in either US equities or commodities.

Monday, February 8

No major macro-economic events scheduled.

Tuesday, February 9

No major macro-economic events scheduled.

Wednesday, February 10

** Fed Chair Ben Bernanke to testify before Congress on the Economic Recovery and Fed Exit Strategy.

Trade Balance – Bureau of Economic Analysis – (www.bea.gov)

Likely Market Reaction: There probably will not be a great deal of market impact on the release of this report. For the previous 12 months the US trade deficit has stayed between $26.0 Billion and $40.0 Billion. Traders will have to stay on their toes in case there is a large shift from this range; however, given most global data this seems unlikely. The big mover of the day will likely be Bernanke’s testimony before Congress—particularly if he gives any type of indication or time frame in which the Fed may tighten monetary policy.

Background: This report measures the difference between the value of US goods & services exported and the value of goods & services the US imports. Under normal conditions a shrinking trade deficit can be a great thing. Unfortunately, due to the global economic turmoil, the US trade gap has not been shrinking due to additional demand of US goods. The reason for the closing of this gap, with exception to last month, has been that while both imports and exports have been dropping, imports have simply been falling faster as American consumers tighten their belts. As of July 2008, we had registered a trade gap as high as negative $64.8 Billion.

Thursday, February 11

Weekly Unemployment Claims – Department of Labor – (www.dol.gov)

Likely Market Reaction: In each of the last four weeks, this report has come in worse than expected; and in the previous three weeks, much worse than expected. Perhaps this is the week when this number finally shows some improvement again; or perhaps not. Either way, I am going to be looking for cues in Mr. Bernanke’s testimony Tuesday for insight into what the Fed is going to be considering when they tighten monetary policy. If Mr. Bernanke stresses employment being a major factor in this decision, I think that a much improved number on this report would lead to dollar strength, perhaps at the cost of equity value, as traders speculate a Fed shift. On the flip side, I can’t really see a negative number on this report helping equities either—except to the extent that the market view would be that the Fed is farther away from absorbing some of the liquidity pumped into the system last year.

Background: There are the two numbers that traders really focus in on in this report. The first is the headline number for unemployment claims the previous week. The second is the total number of unemployed on an ongoing basis (continuing claims). It is important to note though, that the continuing claims’ number can be a bit misleading in these economic conditions. If you are looking from a macro-economic standpoint, please keep in mind that many states only offer benefits for 26 weeks; after that individuals may be put on extended state benefits or emergency federal fund—neither of which will be counted in the continuing claims data. As the recession drags on, more people will not be counted in the continuing claims data even though they are still collecting some type of benefit. Even so, as was proven last week, a drop in continuing claims can bolster the market.

Retail Sales and Core Retail Sales (MoM) – Census Bureau – (www.census.gov)

Likely Market Reaction: After big gains in the retail sector the previous month, December figures disappointed greatly on both the core and broader measures. The only somewhat offsetting factor was a solid revision of the already good November numbers to even better. This month analysts polled have a consensus view that both retail and core retail sales improved by 0.4% in January. If the report shows expected, or particularly better than expected, growth it could create a situation where both US equities markets rise in tandem with a strengthening US dollar; however, if the dollar would appreciate too much, it would likely slow down any corresponding equity rally.

Background: These two indicators are all about the US consumer as they measure the total value of retail level transactions. The core retail sales report is simply all retail sales, less automobile sales. Because of the volatility in automobile sales, it is widely believed that the core number can be a better indication of the overall trend in consumer purchasing. With US consumer accounting for about 1/6 of pre-crisis global GDP, this report can have a far reaching affect, not just in US markets, but around the world.

Friday, February 12

No major macro-economic events scheduled.