What Will Be the Impact of Today’s Vote on the 2011 Budget Omnibus Spending Bill?

budget4/14/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

U.S. stocks opened lower this morning on renewed concerns about European debt issues as well as likely further tightening in China. Higher weekly jobless claims are also weighing on sentiment, and market participants will continue to try to “handicap” Washington’s budget battle today. The later issue has moved front and center following last week’s deal on short-term spending cuts and President Obama’s speech yesterday on long-term deficit reduction. European stocks were down nearly 1% in mid-day trading on debt restructuring speculation for peripheral Europe, mostly Greece and Ireland. Asian stocks were mixed, with Japan’s Nikkei marginally higher and the Hang Seng lower after Chinese money supply and loan data suggested more tightening is yet to come. China concerns are putting some pressure on crude oil this morning despite a big weekly gasoline inventory drawdown reported yesterday.

Looking back at Wednesday, the session was choppy, but in the end, the S&P 500 ended essentially where it started. Overseas gains, gains in resource stocks, and solid retail sales gave the broad averages an early lift. Meanwhile, earnings optimism fueled Tech gains, while initial gains for banks proved fleeting. After early gains turned to modest losses mid-day, the S&P 500 climbed back to even after the Federal Reserve’s Beige Book showed continued improvement in the U.S. economy with little change in inflation expectations. Technology topped the sector rankings, while Financials lost the most ground after regulators ordered mortgage servicers to take a number of actions to reconcile improper foreclosure processes.

The Markets and You Broken Down:

Around our financial planning firm this morning, we were discussing four issues that we thought would be of particular interest to our readers:

  1. The vote on the 2011 budget omnibus spending bill is today. The bill will likely pass, however, an analysis of the bill by the nonpartisan Congressional Budget Office shows that the bill will only reduce federal outlays by $352 million below the 2010 spending rate in what amounts to a mere three-one-hundredths of one percent reduction of federal spending and less than 1% of the “as advertised” $38.5 billion in spending cuts. They also project that total outlays are actually some $3.3 billion more than in 2010 when emergency spending is included in the total. Republicans will seek deeper and longer-term cuts in the battles over the debt ceiling and the 2012 budget to come.
  2. The Fed’s Beige Book indicated that the economy continued to grow modestly in March and April. The Beige Book, a qualitative assessment of business conditions in each of the 12 Federal Reserve districts which is prepared for each of the eight FOMC meetings, indicated that while manufacturers are having some success in passing on higher input costs to consumers, retailers and construction firms cannot yet pass on the higher costs. The Beige Book noted that wage inflation remains subdued, which is a big reason why businesses are having a difficult time passing on higher costs. On balance, the tone of the Beige Book suggests that the Fed will remain on hold at the April 27th FOMC meeting and is not likely to signal a shift in policy until later this year, possibly at the June FOMC meeting.
  3. Chinese data for March suggests that their economy is cooling, but not quickly enough to forestall more rate hikes. Money supply in China grew by 16.6% year-over-year in March and remains above the unofficial 16% year-over-year target for 2011. On balance, the incoming data in China suggests at least a few more policy tightenings in China in the next several months. Market participants in recent weeks have become comfortable with the scope and timing of the remaining policy tightening in China, which has allowed Chinese equities (and other emerging market equities) to outperform U.S. equities.
  4. Treasury yields experienced volatility yesterday, but finished lower for the third straight day. Yields spiked following weak demand at the 10-year note auction, but quickly rallied on fears that Obama’s planned budget cuts would contribute to slower growth. Treasuries are gaining today on renewed European sovereign debt fears and weak jobless claims data.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.

Greg Powell, CIMA
President/CEO
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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