Data Helps Bulls Not Look Down While Hanging Off Fiscal Cliff
With President Obama and Congressional leaders set to meet at 3:00 p.m. ET and the House set to reconvene on Sunday, US equity markets are under pressure in late-morning action as hopes of final-hour fiscal cliff deal are waning. Treasuries are moving higher on the budgetary uncertainty. However, stocks are well off of the worst levels of the day following stronger-than expected domestic reports on regional manufacturing activity and pending home sales.
In equity news, Dow member Hewlett-Packard Co announced that the US Department of Justice has opened an investigation regarding its allegations that software company Autonomy Corp misrepresented itself before HPQ acquired that company last year. Gold is lower and crude oil prices are mixed, while the US dollar is gaining modest ground.
Overseas, Asian stocks moved higher on optimism that the final-hour US fiscal cliff negotiations may result in an 11th hour deal, while some disappointing data and US fiscal cliff uneasiness are weighing on European equities.
Company and Earnings News
Dow member Hewlett-Packard Co. (HPQ $14) announced in a regulatory filing that the US Department of Justice has opened an investigation regarding its allegations that software company Autonomy Corp misrepresented itself before HPQ acquired that company last year. HPQ reported an $8.8 billion writedown for its fiscal 4Q last month, attributing about $5 billion of it to a decline in the value of Autonomy due to alleged improper revenue recognition. Autonomy’s former CEO Mike Lynch responded by saying, “It is extremely disappointing that H-P has again failed to provide a detailed calculation of its $5 billion writedown of Autonomy, or publish any explanation of the serious allegations it has made against the former management team, in its annual report filing today.” HPQ is trading solidly lower.
Regional Manufacturing Activity Expands & Pending Home Sales Exceed Expectations
The Chicago Purchasing Managers Index moved further into expansion territory, rising to 51.6 in December—the highest since August—from 50.4 in November, compared to the improvement to 51.0 that economists surveyed by Bloomberg had expected. A reading above 50 depicts expansion in manufacturing activity. The positive report revealed a jump in new orders from 45.3 to 54.0, production remained above the key 50 mark, and prices paid stayed above 60, while employment fell from 55.2 to 45.9.
Meanwhile, pending home sales rose more than expected in November, increasing 1.7% month-over-month, compared to the 1.0% gain that economists had projected, and the 5.2% jump registered in October was revised to a 5.0% m/m rate of growth. Moreover, compared to last year, sales were up 8.9% in November, below the 12.2% increase that was forecasted, and compared to the downwardly revised 17.8% gain—from the initially reported 18.0% increase—posted in October. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than expected, jumping 5.9% m/m in November.
Treasuries are higher in late-morning action despite the data, as the fiscal cliff uncertainty festers, with the yield on the 2-year note nearly unchanged at 0.26%, while the yields on the 10-year note and the 30-year bond are falling 3 basis points to 1.71% and 2.88%, respectively.
Europe Seeing Red Following Some Lackluster Data
The European equity markets are under some pressure in late-day action, in the wake of some lackluster economic data in the region, while traders are treading cautiously ahead of a final push in the US fiscal cliff negotiations. France’s 3Q GDP was unexpectedly revised lower to a 0.1% quarter-over-quarter (q/q) pace of growth, from the originally-reported 0.2% expansion, where economists expected to nation’s output to remain.
The modest expansion for France’s economy follows the 0.1% q/q contraction seen in 2Q. Meanwhile, Spanish retail sales fell nearly 8% year-over-year in November. On the equity front, shares of Porsche Automobil Holding SE (POAHY $8) are moving nicely higher after a US Appeals Court dismissed a lawsuit against the sportscar maker. Moreover, Atari SA is falling sharply after the videogame maker warned of a “significant’ fiscal-year loss.
The UK FTSE 100 Index is down 0.5%, France’s CAC-40 Index is declining 1.2%, Germany’s DAX Index is trading 0.6% lower, Italy’s FTSE MIB Index is decreasing 0.5%, Spain’s IBEX 35 Index is falling 2.0%, Switzerland’s Swiss Market Index is dipping 0.2%, and Greece’s Athex Composite Index is dropping 1.2%.
Asia Moves Higher As Fiscal Cliff Resolution Hopes Remain
Stocks in Asia finished broadly higher as traders clung to hopes that lawmakers in the US may be able to pull off a final hour fiscal cliff agreement. Japan’s Nikkei 225 Index rose 0.7% to the highest level since March 2011, supported by the continued weakness in the yen versus the US dollar, which sits at the lowest level since August 2010, on growing expectations that the new Japanese leadership will deploy more aggressive monetary policy to try to stoke economic growth and inflation.
More, new leadership on the fiscal and monetary fronts could help growth in the near term, but we believe a more fundamental change to Japanese corporate culture is required before we see lasting and meaningful improvements to the economy. In the meantime, the stock market could rally if the government is able to sustain recent weakness in the yen—but pressure on corporate profits may continue and be a headwind for Japanese stocks. The gains for Japanese stocks came despite some lackluster economic data, as Japan’s Manufacturing PMI Index fell further into contraction for December, industrial production fell more than expected for November, retail sales came in flat last month, and consumer price inflation fell in November.
Elsewhere, South Korea’s Kospi Index rose 0.5% as a report showed the nation’s industrial production increased at a much larger rate than expected for November, while mining issues supported a 0.5% increase for Australia’s S&P/ASX 200 Index as iron ore prices continued to rebound. Meanwhile, India’s BSE Sensex 30 Index rose 0.6%, the Hong Kong Hang Seng Index increased 0.2% and China’s Shanghai Composite Index gained 1.2%.Read More
U.S. holiday retail sales this year were the weakest since 2008, when the nation was in a deep recession. In 2012, the shopping season was disrupted by bad weather and consumers’ rising uncertainty about the economy.
A report that tracks spending on popular holiday goods, the MasterCard Advisors SpendingPulse, said Tuesday that sales in the two months before Christmasincreased 0.7 percent, compared with last year. Many analysts had expected holiday sales to grow 3 to 4 percent.
In 2008, sales declined by between 2 percent and 4 percent as the financial crisis that crested that fall dragged the economy into recession. Last year, by contrast, retail sales in November and December rose between 4 percent and 5 percent, according to ShopperTrak, a separate market research firm. A 4 percent increase is considered a healthy season.
Shoppers were buffeted this year by a string of events that made them less likely to spend: Superstorm Sandy and other bad weather, the distraction of the presidential election and grief about the massacre of schoolchildren in Newtown, Connecticut.
The numbers also show how Washington’s current budget impasse is trickling down to Main Street and unsettling consumers. If Americans remain reluctant to spend, analysts say, economic growth could falter next year.
In the end, even steep last-minute discounts weren’t enough to get people into stores, said Marshal Cohen, chief research analyst at the market research firm NPD Inc.
“A lot of the Christmas spirit was left behind way back in Black Friday weekend,” Cohen said, referring to the traditional retail rush the day after the Thanksgiving holiday in late November. “We had one reason after another for consumers to say, `I’m going to stick to my list and not go beyond it.”‘
Holiday sales are a crucial indicator of the economy’s strength. November and December account for up to 40 percent of annual sales for many retailers. If those sales don’t materialize, stores are forced to offer steeper discounts. That’s a boon for shoppers, but it cuts into stores’ profits.
Last-minute shoppers like Kris Betzold, of Carmel, Indiana, embraced discounts that were available before Christmas.
“We went out yesterday, and I noticed that the sales were even better now than they were at Thanksgiving,” said Betzold while shopping Monday at an upscale mall in Indianapolis. Betzold, who said the sluggish economy prompted her and her husband to be more frugal this year, noted that she saved about $25 on a Kindle Fire she found at Best Buy.
Spending by consumers accounts for 70 percent of overall economic activity, so the eight-week period encompassed by the SpendingPulse data is seen as a critical time not just for retailers but for manufacturers, wholesalers and companies at every other point along the supply chain.
The SpendingPulse data include sales by retailers in key holiday spending categories such as electronics, clothing, jewelry, luxury goods, furniture and other home goods between Oct. 28 and Dec. 24. They include sales across all payment methods, including cards, cash and checks.
It’s the first major snapshot of retail sales during the holiday season through Christmas Eve. A clearer picture will emerge next week as retailers like Macy’s and Target report revenue from stores open for at least a year. That sales measure is widely watched in the retail industry because it excludes revenue from stores that recently opened or closed, which can be volatile.
Despite the weak numbers out Tuesday, retailers still have some time to make up lost ground. The final week of December accounts for about 15 percent of the month’s sales, said Michael McNamara, vice president for research and analysis at MasterCard Advisors SpendingPulse. As stores offer steeper discounts to clear some of their unsold inventory, they may be able to soften some of the grim results reflected in Tuesday’s data.
Still, this season’s weak sales could have repercussions for 2013, he said. Retailers will make fewer orders to restock their shelves, and discounts will hurt their profitability. Wholesalers, in turn, will buy fewer goods, and orders to factories for consumer goods will likely drop in the coming months.
In the run-up to Christmas, analysts blamed the weather and worries about the “fiscal cliff” for putting a damper on shopping. Superstorm Sandy battered the Northeast and mid-Atlantic states in late October. Many in the New York region were left without power, and people farther inland were buried under feet of snow. According to McNamara, the Northeast and mid-Atlantic account for 24 percent of U.S. retail sales.
Buying picked up in the second half of November as retailers offered more discounts and shoppers waylaid by the storm finally made it into malls, he said.
But as the weather calmed, the threat of the “fiscal cliff” picked up. In December, lawmakers remained unable to reach a deal that would prevent tax increases and government spending cuts set to take effect at the beginning of 2013. If the cuts and tax hikes kick in and stay in place for months, many economists expect the nation could fall back into recession.
The news media discussed this possibility more intensely as December wore on, making Americans increasingly aware of the economic troubles they might face if Washington is unable to resolve the impasse. Sales never fully recovered, Cohen said.
The results were weakest in areas affected by Sandy and a more recent winter storm in the Midwest. Sales declined by 3.9 percent in the mid-Atlantic and 1.4 percent in the Northeast compared with last year. They rose 0.9 percent in the north central part of the country.
The West and South posted gains of between 2 percent and 3 percent, still weaker than the 3 percent to 4 percent increases expected by many retail analysts.
Online sales, typically a bright spot, grew only 8.4 percent from Oct. 28 through Saturday, according to SpendingPulse. That’s a dramatic slowdown from the online sales growth of 15 to 17 percent seen in the prior 18-month period, according to the data service.
Online sales did enjoy a modest boost after the recent snostorm that hit the Midwest, McNamara said. Online sales make up about 10 percent of total holiday business.Read More
President Barack Obama cut short his Hawaiian vacation, and Congress is on call through the holidays as the nation heads to the year-end “fiscal cliff.”
House Speaker John Boehner said “God only knows” how a deal can be reached now, while Obama insisted a bargain could still be struck before Dec. 31. “Call me a hopeless optimist,” he said. Here’s a look at why it’s so hard for Republicans and Democrats to compromise on urgent matters of taxes and spending, and what happens if they fail to meet their deadline.
NEW YEAR’S HEADACHE
Partly by fate, partly by design, some scary fiscal forces come together at the start of 2013 unless Congress and Obama act to stop them. They include:
Some $536 billion in tax increases, touching nearly all Americans, because various federal tax cuts and breaks expire at year’s end.
About $110 billion in spending cuts divided equally between the military and most other federal departments. That’s about 8 percent of their annual budgets, 9 percent for the Pentagon.
Hitting the national economy with that double whammy of tax increases and spending cuts is what’s called going over the “fiscal cliff.” If allowed to unfold over 2013, it would lead to recession, a big jump in unemployment and financial market turmoil, economists predict.
WHAT IF THEY MISS THE DEADLINE?
If New Year’s Day arrives without a deal, the nation shouldn’t plunge onto the shoals of recession immediately. There still might be time to engineer a soft landing.
So long as lawmakers and the president appear to be working toward agreement, the tax hikes and spending cuts could mostly be held at bay for a few weeks. Then they could be repealed retroactively once a deal was reached.
The big wild card is the stock market and the nation’s financial confidence: Would traders start to panic if Washington appeared unable to reach accord? Would worried consumers and businesses sharply reduce their spending? In what could be a preview, stock prices around the world dropped last Friday after House Republican leaders’ plan for addressing the fiscal cliff collapsed.
Federal Reserve Chairman Ben Bernanke has warned lawmakers that the economy is already suffering from the uncertainty and they shouldn’t risk making it worse by blowing past their deadline.
WHAT IF THEY NEVER AGREE?
If negotiations between Obama and Congress collapse completely, 2013 looks like a rocky year.
Taxes would jump $2,400 on average for families with incomes of $50,000 to $75,000, according to a study by the non-partisan Tax Policy Center. Because consumers would get less of their paychecks to spend, businesses and jobs would suffer.
At the same time, Americans would feel cuts in government services; some federal workers would be furloughed or laid off, and companies would lose government business. The nation would lose up to 3.4 million jobs, the Congressional Budget Office predicts.
“The consequences of that would be felt by everybody,” Bernanke said.
Much of the disagreement surrounds the George W. Bush-era income tax cuts, and whether those rates should be allowed to rise for the nation’s wealthiest taxpayers. Both political parties say they want to protect the middle-class from tax increases.
Several tax breaks begun in 2009 to stimulate the economy by aiding low- and middle-income families are also set to expire Jan. 1. The alternative minimum tax would expand to catch 28 million more taxpayers, with an average increase of $3,700 a year. Taxes on investments would rise, too. More deaths would be covered by the federal estate tax, and the rate climbs from 35 percent to 55 percent. Some corporate tax breaks would end.
The temporary Social Security payroll tax cut also is due to expire. That tax break for most Americans seems likely to end even if a fiscal cliff deal is reached, now that Obama has backed down from his call to prolong it as an economic stimulus.
If the nation goes over the cliff, budget cuts of 8 percent or 9 percent would hit most of the federal government, touching all sorts of things from agriculture to law enforcement and the military to weather forecasting. A few areas, such as Social Security benefits, Veterans Affairs and some programs for the poor, are exempt.
THERE’S MORE AT STAKE
All sorts of stuff could get wrapped up in the fiscal cliff deal-making. A sampling:
Some 2 million jobless Americans may lose their federal unemployment aid. Obama wants to continue the benefits extension as part of the deal; Republicans say it’s too costly.
Social Security recipients might see their checks grow more slowly. As part of a possible deal, Obama and Republican leaders want to change the way cost-of-living adjustments are calculated, which would mean smaller checks over the years for retirees who get Social Security, veterans’ benefits or government pensions.
The price of milk could double. If Congress doesn’t provide a fix for expiring dairy price supports before Jan. 1, milk-drinking families could feel the pinch. One scenario is to attach a farm bill extension to the fiscal cliff legislation — if a compromise is reached in time.
Millions of taxpayers who want to file their 2012 returns before mid-March will be held up while they wait to see if Congress comes through with a deal to stop the alternative minimum tax from hitting more people.
CALL THE WHOLE THING OFF?
In theory, Congress and Obama could just say no to the fiscal cliff, by extending all the tax cuts and overturning the automatic spending reductions in current law. But both Republicans and Democrats agree it’s time to take steps to put the nation on a path away from a future of crippling debt.
Indeed, the automatic spending cuts set for January were created as a last-ditch effort to force Congress to deal with the debt problem.
If Washington bypassed the fiscal cliff, the next crisis would be just around the corner, in late February or early March, when the government reaches a $16.4 trillion ceiling on the amount of money it can borrow.
Boehner says Republicans won’t go along with raising the limit on government borrowing unless the increase is matched by spending cuts to help attack the long-term debt problem. Failing to raise the debt ceiling could lead to a first-ever U.S. default that would roil the financial markets and shake worldwide confidence in the United States.
To avoid that scenario, Obama and Boehner are trying to wrap a debt limit agreement into the fiscal cliff negotiations.
SO WHAT’S THE HOLDUP?
They’re at loggerheads over some big questions.
Obama says any deal must include higher taxes for the wealthiest Americans. Many House Republicans oppose raising anyone’s tax rates. Boehner tried to get the House to vote for higher taxes only on incomes above $1 million but dropped the effort when it became clear he didn’t have the votes.
Republicans also insist on deeper spending cuts than Democrats want to make. And they want to bring the nation’s long-term debt under control by significantly curtailing the growth of Medicare, Medicaid and Social Security — changes that many Democrats oppose.
Obama, meanwhile, wants more temporary economic “stimulus” spending to help speed up a sluggish recovery. Republicans say the nation can’t afford it.
IT’S NOT JUST WASHINGTON
Seems like they could just make nice, shake hands and split their differences, right?
But there’s a reason neither side wants to give ground. The two parties represent a divided and inconsistent America. True, Obama just won re-election. But voters also chose a Republican majority in the House.
Republican and Democrats alike say they are doing what the voters back home want.
Neither side has a clear advantage in public opinion. In an Associated Press-GfK poll, 43 percent said they trust the Democrats more to manage the federal budget deficit and 40 percent preferred the Republicans. There’s a similar split on who’s more trusted with taxes.
About half of Americans support higher taxes for the wealthy, the poll says, and about 10 percent want tax increases all around. Still, almost half say cutting government services, not raising taxes, should be the main focus of lawmakers as they try to balance the budget.
When asked about specific budget cuts being discussed in Washington, few Americans express support for them.
Time for deal-making is short, thanks to the holiday and congressional calendars. Some key dates for averting the fiscal cliff:
Lawmakers are expected to return to the Capitol on Thursday, leaving less than a week to vote on a compromise before year’s end.
Obama is scheduled to arrive back in Washington on Thursday.
If lawmakers reach Dec. 31 without a deal, some economists worry that the financial markets might swoon.
The current Congress is in session only through noon Eastern time on Jan. 3. After that, a newly elected Congress with 13 new senators and 82 new House members would inherit the problem.Read More