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Stock markets yo-yoed their way to another weekly advance last week, albeit narrow one. The “wall of worry,” it seems, is very much still with us, and investors did their best to keep climbing it, nervously looking over their shoulders with every step. While U.S. consumers became more optimistic (a plus for the market), new jobless claims rose, holiday retail sales waned, the trade deficit widened, and, oh yes, France lost its triple-A credit rating.
Generally, markets love positive consumer sentiment. A happy consumer is a spending consumer. The Thomson Reuters/University of Michigan’s preliminary consumer sentiment index for early January suggests that U.S. consumers are a happy bunch indeed. The overall index rose to 74.0 in January from 69.9 in December, the highest level in eight months.
Of course, consumer sentiment is notoriously fickle, much like stock markets, come to think of it, so it’s not an entirely reliable indicator of things to come, and it would be imprudent to extrapolate a trend from a month or two of consumer surveys. One telling point in the January sentiment survey was that a scant 24% of respondents expected their financial situation to improve.
And that could be a sticking point if a recent spike in new U.S. claims for first-time unemployment benefits hands off to a bleaker picture of the labor market this month. The unemployment rate for December came in at 8.5%, down from a revised 8.7% in November. But the U.S. Department of Labor reported that initial unemployment claims surged to a six-week high of 399,000 last week. Still, that may have been a result of seasonal fluctuations that were not entirely accounted for by the Labor Dept.
So are those happy, still-employed consumers spending any more? Not according to the U.S. retail sales figures for the holiday shopping season just passed. After starting out strong on Black Friday and Cyber Monday, American consumers lost some of their appetite for spending it appears. Maybe it was the thought of over-eager shopper wielding canisters of pepper spray that kept shoppers home. Whatever the reason, retail sales rose just 0.1% in December from November, according to the Commerce Department. It was the third month of slower retail sales growth.
It may well be that consumers have raided the piggy-bank as much as they dare, given the reality of stalled wage growth and a still-precarious labor market. With households still deleveraging and the real estate market bottoming out, the outlook for a revival in consumer spending anytime soon has soured. And until jobs growth picks up significantly, commensurate with a decline in the unemployment rate, consumer spending will remain stalled. Flaccid consumer spending is likely to weigh on GDP growth through the first half of 2012, too, because it comprises about two thirds of U.S. economic activity.
Another piece of rather chunky ballast holding down U.S. GDP growth is external trade. The Commerce Department reported that the U.S. trade gap grew in November to its widest in five months. The deterioration in the balance of trade can be traced to a record high level of imports, which rose 1.3%, led by growing inflows of crude oil. But at the same time, exports fell 0.9% in November, reflecting the trend in global economic cooling. A continuing decline in exports would suggest knock-on effects for U.S. manufacturing in coming months, implying weaker GDP growth in the first and possibly second quarters of 2012, down from the roughly 3% growth forecast for the fourth quarter of 2011.
Incidentally, Canada recorded a surprise trade surplus in November, as exports rose 3.2% in the month, led by gains in energy and auto exports. At the same time, imports cooled 0.8%. The trade surplus isn’t likely to have much impact on fourth-quarter GDP growth, and isn’t expected to continue into the first half of 2012, when the effects of slower global economic growth return the trade balance to deficit.
A complete absence of balance of any sort still defines the messy European debt crisis. As expected, rating agency Standard & Poor’s shaved a notch off France’s AAA sovereign debt rating, and cut the debt ratings on eight other countries as well. Portugal’s rating was cut to junk status. The France rating cut isn’t a disaster, and had been widely telegraphed. Still, it could have an impact on the European Financial Stability Facility, the region’s main bailout fund, whose AAA credit rating depends on similar ratings for its biggest national backers. Any cut in the EFSF’s rating would mean a reduction in its lending capacity.
Meanwhile, creditor banks broke off talks with Greece, after failing to agree on how much of a haircut they would have to take in a bond swap. A press release said the talks were “paused for reflection on the benefits of a voluntary approach.” It all sounds very Zen-like, but unless a deal is hammered out when the talks resume on Jan. 18, a disorderly Greek default becomes a real possibility, along with a departure from the eurozone.
Plenty to worry about to be sure. And market activity reflected that, yo-yoing through an indecisive week. Still, the big North American indexes ended the week with gains. The S&P/TSX Composite Index advanced 0.4% week over week. The Dow Jones Industrial Index edged up 0.5% on the week, while the S&P 500 Composite Index gained 0.9%. Gold, meanwhile, climbed US$22 per ounce to near US$1,640 per ounce.
Fourth-quarter earnings season is upon us now, and we’ll soon see whether that wall of worry becomes insurmountable.
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