In Between Days

by CC December 26, 2011 11:28 pm • Commentary


U.S. holiday season sales were expected to rise 3.8 percent to a record $469.1 billion, the National Retail Federation said, slower than last year’s growth but stronger than its preseason forecast.

The potential brisk sales could reinforce emerging views that the U.S. economy is strengthening fundamentally, and follows recent data showing improvement the labout market. The number of Americans filing new claims for jobless benefits hit a 3-1/2-year low in the week shortly before Christmas while consumer sentiment reached a six-month high in December.

Investors will be looking for more positive signs when reports are released about the S&P Case-Shiller house price index for October and consumer confidence for December .

Sentiment has been underpinned by solid performances in U.S. equities, and strong data could help global markets end the year with a positive tone.

The broad Standard & Poor’s 500 Index .SPX on Friday broke through its 200-day moving average after a four-day rally lifted stocks to bring the index into positive territory. The Dow Jones industrial average .DJI rose to its highest in five months, leaving it up 6 percent for the year.


U.S. inflation is slowing after a surge early in the year. … The Fed has been considering new steps to spur growth. Two ideas are on the table: commit to keep short-term interest rates near zero for even longer than through mid-2013, and restart a bond-buying program aimed at driving already-low long-term interest rates lower. Before taking either step, though, Fed officials would want to have some comfort that they wouldn’t be creating undesired inflation.

Calculated Risk

As Hilsenrath notes, inflation is slowing by most key measures, and this will give the Fed more leeway. It always seems the Fed telegraphs their intentions, and it now seems very likely the Fed will add a range of Fed funds rate forecasts to their quarterly economic projections at the next FOMC meeting on January 24th and 25th.

If the Fed funds rate forecasts are added, this would replace the sentence in the FOMC statement – “The Committee … currently anticipates that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013”. The bond buying program (aka QE3) would be data dependent and probably start a little later in the year if economic growth disappoints.


The Market Climate in stocks last week continued to fall into a classification that has often been associated with a “whipsaw trap,” though as usual, we are aware that about 30% of these instances have gone on to achieve some amount of extended gains, so we continue to monitor the evidence – particularly market internals and sentiment – closely here. As I noted last week, there is a typical “sentiment cycle” in economic surprises, which we would expect to roll over to an increasing number of economic disappointments in the weeks ahead, but we’ll respond to the data as it emerges. Given that we’re in a typically low-volume, slightly positive seasonal period, I expect that day-to-day movements over the next several sessions may be more influenced by those factors than by meaningful economic or international developments


Speculation is mounting that Beijing will further cut bank reserve requirement ratios, as inflationary pressure is easing while overall growth in the economy is slowing.

Earlier this month, the People’s Bank of China cut commercial bank reserve requirements by half a percentage point, the first such decrease in three years. Many analysts expect more cuts to come next year, but the nation’s massive money supply will become an issue.

This year, new loans are set to approach 7.5 trillion yuan ($1.19 trillion), twice the amount in 2007 and 50% more than in 2008. The amount of social financing, a broader gauge of money supplies than M2, was even larger, given that a growing percentage of the money supply now comes from sources other than bank loans.

According to the central bank, in the first three quarters, yuan-denominated bank loans accounted for only 58% of all social financing, which stood at 9.8 trillion yuan. Other forms of financing include trust products, corporate bonds and non-financial institutions’ stocks.

Analysts say the government needs to be wary of the risks from rapidly escalating bank loans. The central bank now has less leeway in relaxing credit controls as current loan-growth rates and money supplies remain relatively high to nominal GDP growth.