In life we deal with opposites and opposing forces every day, hot/cold, positive/negative and so on. In the financial markets it is much the same. Global activity is poised to benefit from strengthened balance sheets in developed markets, less uncertainty and lower inflation. On one opposite end stands the Fed. If growth and hiring continue their positive trends, Yellen will have to begin tapering the bond purchases, removing stimulus from the economy, potentially counteracting some of the strength. With inflation contained for now, smart money is on Yellen waiting longer to taper. Thus we have the current tug of war being waged in the financial markets. In short, every time the Fed provided stimulus the market rallied so the belief is when it is removed, the market may fall or more to the point, rise less rapidly than it has this year.
Bulls believe momentum is strong enough to power through any potential barriers such as tapering, higher taxation or sequestration cuts. Bears point to slowing growth in China, tepid global growth, waning bullish conviction or declining corporate profits as negatives for the market. (It is normal to see corporate profits decline during a cyclical recovery at the expense of labor compensation), You can pick other indicators and data points to fortify either case. Since historically the odds favor the bulls, we don’t see it so much as a tug of war. Rather we see it is more aligned with a ship tacking in the wind to move forward. Housing, employment and corporate profits continue to provide a positive tailwind.
Looking at recent numbers, employment rate, international trade, construction spending, etc., all remain in positive territory with recent releases exceeding expectations in some cases. The tail-wind appears to be stable and in fact, it appears to be a similar tailwind to that of the late 90’s.
Can we throw any dead weight off to go faster? Yes, when the Fed does taper it is likely to boost the dollar relative to other currencies, making U.S. investments more attractive, making foreign goods cheaper leaving more money for the consumer to spend. Keep energy prices contained and you give U.S. manufacturing and the consumer another boost. On top of all this, corporations need to begin refurbishing plant and equipment and they seem to have the cash to do so. While we may need to tack, the tailwind for now seems to be in place.
Data On Deck
Monday, December 9
12:00PM Flow of Funds, Q3
12:50PM Richmond Fed President Lacker (FOMC non-voter) speaks
01:05PM St. Louis Fed President Bullard (FOMC voter) speaks
02:15PM Dallas Fed President Fisher (FOMC non-voter) speaks
Tuesday, December 10
07:30AM NFIB small business optimism index, November (consensus 92.6, last 91.6)
10:00AM JOLTS job openings, October (last 3,913k)
10:00AM Wholesale inventories, October (consensus +0.3%, last +0.4%)
Wednesday, December 11
02:00PM Monthly Treasury Statement, November (consensus -$142.0bn, last -$91.6bn)
Thursday, December 12
08:30AM Retail sales, November (consensus +0.6%, last +0.4%)
08:30AM Initial jobless claims, week ended December 7 (consensus 320k, last 298k)
Continuing jobless claims, week ended November 30 (consensus 2,764k, last 2,744k)
08:30AM Import price index, November (consensus -0.7%, last -0.7%)
Friday, December 13
08:30AM PPI, November (consensus +0.0%, last -0.2%)
Core PPI, November (consensus +0.1%, last +0.2%)
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