It seems ironic that in this season where our children’s Christmas gifts usually operate at the decibel level of a jet engine, the electronics retailer Best Buy had a big earnings shortfall this morning. (Well, look on the bright side, ‘Silent Night’ may really be true this year!). The S&P 500 still managed to open higher despite the Best Buy performance warning. Traders were not very active early in the day, with focus on the Federal Reserve and their plans for bond purchases. Today is also the first day of a busy data week that the markets will be closely following.
Around the office this morning, we were discussing four major items that we thought would be of particular interest to our readers:
The U.S. Senate passed the tax cut compromise bill and forwarded it on to the House. Final vote tally was 83-15 (two Democrats did not vote) and carried significant support from both political parties. Now that it is on to the House, the bill will probably be changed modestly given opposition by House Democrats.
Overall, November retail sales beat expectations. What are known as “core retail sales” (which excludes gas, building materials and autos) accelerated to +0.9% in November from +0.5% in October and are also showing improving annualized gains that could “bump up” fourth quarter GDP estimates.
Despite stronger economic growth, the Fed will probably not end quantitative easing (QE2) early. As it currently stands, QE2 is expected to be completed in June 2011. For it to end earlier, the economy would need to generate monthly job growth in the 300,000 to 400,000 range for several months coupled with a significant increase in the core inflation rate. The way that we see it, this is just too big of a mountain to climb to justify QE2 stopping prior to June.
It’s really interesting to see how China and the U.S compare at the moment. Chinese inflation is running at 5% versus 1% in the U.S. The U.S. economy is mostly driven by domestic consumption and runs a substantial trade deficit, where China’s economy is driven by exports and has a large trade surplus. Our economy carries a large debt-to-GDP ratio, where in China that ratio is small. Not surprisingly, forecasters see the Chinese remaining a strong growth engine in the world economy, although not necessarily a profitable one for investors in the country. Chinese stocks, measured by the Shanghai composite, are down about 10% this year compared to an 11% U.S. gain.
As always, email me here with 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