Potential Government Shutdown and Market Moving Reports

Mac, Ashley and Greg meeting
Mac, Ashley and Greg discussing current market situations

2/28/11: 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 higher this morning as lower crude prices buoyed sentiment despite continued Libyan turmoil and protests in oil-producer Oman.  St. Louis Fed President Bullard also helped coerce some bulls into stocks with a favorable economic outlook even with near triple-digit oil prices.  Overseas, European stocks are mixed, with the U.K. weighed down by a lowered outlook form a major British banking company.  Asian markets are mostly higher despite a moderate 7% five-year economic growth target from the Chinese government.  Metals are mostly higher, while agriculture commodities are mixed – wheat, corn and soybeans are down slightly while livestock, cocoa, coffee, cotton and sugar are solidly higher.  The dollar is down near three-month lows on divergent central bank outlooks between the U.S. and much of the world.

Looking back at Friday, stocks snapped a three-day losing streak with stable oil prices and a strong consumer confidence report, offsetting a downward revision to 2010 fourth quarter GDP.  The situation in Libya has not necessarily improved, but market participants appeared to gain some incremental comfort in the scope of tensions in the region.  All of the cyclical sectors except Industrials gained over 1% (Industrials were up a “not-too-shabby” 0.9%), and all ten S&P sectors were higher.  West Texas Intermediate crude gained about a half percent to near $98 in a welcomed relatively calm session.  Broad commodities indexes rose nearly 2% led by natural gas, copper and agriculture.  Friday’s gains pared the week’s losses, but the nearly 2% decline for the S&P 500 still marked the worst week since November.

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

More on the economic data for this week that we highlighted above. Early in the week, reports on manufacturing  sentiment in the United States (Chicago Area Purchasing Managers Index), the Institute for Supply Management’s (ISM) report on business for February, along with a report on Chinese manufacturing sentiment in February will garner most of the market’s attention.  By midweek, the market will begin to focus on the labor market in February with the release of the Challenger layoff data and the ADP employment report for February.  The consumer is in the mix this week as well, with reports on consumer spending and personal income for January, vehicle sales for February and chain store sales for February all due out.  The week concludes with the much-anticipated employment report for February, which is likely to show that the economy added over 200,000 jobs in February after severe weather held down employment in January.

Events in Libya and China improved the inflation picture outside of the United States, where oil and food prices are a bigger driver of inflation pressure. Libyan rebels allowed oil shipments to resume in areas under their control after there had been no oil shipments from the eastern territory in more than a week.  China, the world’s largest wheat grower, had widespread rain in drought-hit crop areas in the past three days according to the weather bureau and a state ministry.  Oil and grain prices declined modestly as inflation concerns eased slightly.

The markets could face a government shutdown at the end of this week if Congress does not agree to a continuing resolution to extend funding for this fiscal year on or before March 4th. During the last government shutdown, the Federal Reserve cut interest rates helping to halt the stock market’s slide.  The range of potential outcomes could include default on U.S. government debt at the extreme; however, the most likely outcome is that the impasse is resolved with modest cuts and is probably neutral for the markets, but may not come until a market-volatility-inducing showdown in Congress over funding takes place starting this week.

Treasury yields are lower by 2 basis points this morning following lower-than-expected personal spending data. The Fed’s preferred measure of inflation, core PCE, increased to 0.8% year-over-year but remains below the Fed’s stated comfort zone.  St. Louis Fed President Bullard today discussed the possibility of ending QE2 early should the economic data continue to improve.  A final decision on the fate of QE2 likely has not been made and will depend upon upcoming employment and inflation data.  Futures markets are not fully pricing in an interest rate hike until 2012.

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
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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