2/17/2012
By Carlos Guillen, Research Analyst

Stocks are traded slightly higher during this week of trading as investors continue to see positive signs that the Greek debt situation will likely be solved this coming Monday and continue to receive positive data points indicating an improving macroeconomic backdrop.

All signs continue to be positive coming from European leaders as they said that they were optimistic on prospects for a deal on a Greek rescue package next week despite high tensions after Greece adopted a series of painful austerity measures this week. Moreover, the European Central Bank began a debt swap arrangement to reduce losses on their holdings of Greek government bonds after Italian Prime Minister Mario Monti and German Chancellor Angela Merkel held a conference call on the debt crisis with Greek Prime Minister Lucas Papademos. According to reports, the three were confident that a deal can be reached on Greece at the Eurogroup on Monday.

Here at home, earlier this week, retail sales rose less than expected in January, negatively affected by deep discounting in the auto sector. The positive side, however, was that excluding autos, core consumer sales is indicating that macroeconomic growth with continue. According to the Commerce Department, total retail sales increased 0.4 percent this past month, below the Street's consensus estimate of a 0.7 percent increase. Sales excluding autos, gasoline, and building materials rebounded 0.7 percent after falling 0.4 percent the prior month, and landed above the Street's consensus estimate of a 0.5 percent increase. Also supporting macroeconomic growth that confidence among small U.S. business owners hit a four year-high in January, according to the National Federation of Independent Business.

Moreover, we saw that manufacturing is doing pretty well and will continue to fuel GDP growth this year. The Empire State Manufacturing survey showed acceleration in regional manufacturing activity in February, with the index jumping to 19.5 from 13.5 in January, landing higher than the Street's consensus estimate of 14.0 and representing the best reading since June 2010; more on this below.

On Thursday we were encouraged that employment data continued to come in rather favorably. According to the Labor Department, initial claims during the week ended February 11 totaled 348K, which decreased from the 361K revised figure reported for the prior week and landed below the Street's estimate of 365K. The four-week moving average of insured unemployment for the week ended January 28 totaled 3,493K, representing a decrease of 8.25K week to week. The down trend in the initial claims four-week moving average is strong, totaling 365K and representing the fifth consecutive week of declining level, which may lead to further declines in the unemployment rate moving forward.

Also a bit encouraging was better than expected overall Producer's Price Index (PPI) data. According to the Labor Department, PPI increased by 0.1% in January after decreasing 0.1% in December, landing below the Street's estimate of a 0.3% increase. However, perhaps a bit disappointing was that eliminating the noise effects of food and energy, PPI increased by 0.4%, above the Street's estimate of 0.2%.

Lastly, on Friday, inflation for the consumer came in rather mixed. According to the Labor Department, the Consumer Price Index (CPI-U) increased 0.2 percent in January, landing below the Street's estimate of 0.3 percent. However, excluding the food and energy contributions to inflation, core CPI was 0.2 percent, higher than the Street's estimate of 0.1 percent. On one hand, the fact that total inflation was less than expected is certainly encouraging for consumers as they will likely be motivated to continue shipping. On the other hand, given that core inflation was larger than expected, the Fed may feel a bit more restricted in terms of easing money for the longer term. Moreover, despite that both measures of inflation increased at the same rate, it should be noted that gasoline prices jumped 0.9 percent in January, serving to remind us of the risks energy costs pose to the economic recovery. It is apparent that part of the reason for the higher cost of gasoline reflects the recent tensions in the Middle East that have pushed oil prices higher.

Over the last 12 months, total CPI has increased 2.9 percent, decreasing from the 3.0 percent posted for December. At the same time, core CPI has increased 2.3 percent, increasing from the 2.2 percent posted for December. Given that the Fed focuses more on core CPI, the result does not really impede the Fed from enacting monetary policy; however, reluctance to easy money will likely increase.

Another report on Friday showed that the indexes of leading indicators improved, although not as much as expected. Leading indicators are continuing to show that the U.S. economy is dealing well with the debt situation in Europe and the slowing growth in China. The Conference Board announced that its index of Leading Economic Indicators increased by 0.4% in the time frame between December and January, landing slightly below the Street's consensus estimate of 0.5% but continuing to move in the right direction. The increase represented the fourth consecutive month of improvements to the index. The results were a clear positive; the leading indicator results were encouraging in that there were more positive components and in that the index continued to increase. Most of all, the news was encouraging because it is signaling that the economy will likely continue to expand through this year.

Carlos Guillen
Wall Street Strategies