After a move down for stocks last week, investors will look to the Fed and GDP, as well as corporate earnings reports for direction in the week ahead.
Last week, the president surprised us and the Democrats with a compelling State of the Union Address. He skillfully controlled the ovation in his favor, with Democrats often finding themselves confused as to how to react to his comments without offending the American public. Still, we do not expect much to be accomplished by the divided branches of government over the next two years.
One-quarter of the companies in the S&P 500 Index reported earnings last week, and nearly another quarter of them will report this week, including Procter & Gamble, Altria, Time Warner and Exxon Mobil. Some significant NASDAQ components are scheduled to report as well, including Google and Amazon Corp. Thomson Financial currently estimates earnings for the S&P 500 Index to grow less than 10% in the fourth quarter of 2006, marking the first time in five years the index will have grown at a rate below double-digits.
Despite the slew of earnings reports on the slate for this week, we expect economic data to drive the market, keyed by the advance GDP report and Fed meeting statement on Wednesday. With a good deal of encouraging data preceding this week's report, we anticipate the Fed to focus even more on inflation. Suddenly, the seemingly overly cautious Richmond Fed President, Jeffrey Lacker, who has continually voted to raise rates, is looking more and more like the voice of reason. We expect the market to pay close attention to average hourly earnings and prices in the future, as we believe a rate increase is now more likely than a decrease.
Monday represents the quiet before the storm, as a light data schedule will allow market participants to ease into the groove. No economic data is due for release. Preparations will begin for peace negotiations regarding the Palestinian territories. Sure seems a dollar short and minute too late, as Gaza stands on the brink of civil war. Months ago, we highlighted our concern that American and Iranian interests would fertilize a rift between the Palestinian political groups, Fatah and Hamas. In recent weeks, America has authorized funds for Mahmoud Abbas' Fatah party, while Egypt has gone so far as to ship arms to Abbas with the permission of Israel. At the same time, Hamas leaders traveled to Iran and have vowed to never accept Israel as a sovereign nation. A unified government looks like an impossibility for the Palestinians, and yet another opportunity seems lost. Companies scheduled to report earnings on Monday include Verizon Communications, Schering-Plough, Phelps Dodge Corp. and Sysco Corporation.
Tuesday starts the data parade with the 10:00 a.m. January consumer confidence report from the Conference Board. A consensus of economists surveyed by Bloomberg sees the index measuring 110.0 compared to 109.0 in December. A recent report from the University of Michigan showed confidence high among consumers, and lower gasoline prices have likely played role in that regard.
The long anticipated release of Microsoft's Windows Vista operating system should brighten the view for the tech giant on Tuesday, after its quarter reported last week was impacted by the product's delay. Others reporting earnings Tuesday include Procter & Gamble, Merck & Co., Wyeth, 3M Company, United Parcel Services, Allstate Corp., Colgate-Palmolive, Illinois Tool Works, Countrywide Financial, AFLAC Inc. and Chubb Corporation. In overseas activity, Indian markets will be closed on Tuesday.
Wednesday will be a telltale day for the week, with critical data revealed. The markets will anxiously await the 8:30 a.m. advanced report of fourth quarter GDP. Estimates for the most important metric of economic health have gradually risen during the month, from 2% to now 3% among experts measured by Bloomberg. Economists have gained confidence in the growth measure due to strong reports from leading economic indicators.
The most important news of the day is likely to come from the Federal Reserve at 2:15 p.m., when they report their decision on interest rates. The Fed is widely anticipated to hold rates steady this time around, but market participants will be closely attuned to the official statement for any sign of a future rate hike. In recent statements, the Fed has brought focus to its concern about inflation, and with economic growth apparently sustainable despite housing weakness, perhaps the Fed will now act more aggressively to bring inflation down into its target range of 1-2%.
At 10:00 a.m. EST, the National Association of Purchasing Management - Chicago issues its purchasing managers index. Bloomberg's consensus of experts forecasts a reading of 52.0, versus a revised 51.6 measure for December. The measure will be viewed as a prelude to the ISM data release on Thursday. Also on Wednesday, December construction spending will be reported and Bloomberg's consensus forecasts no change for December, after November showed a decrease of 0.2%. The commercial construction market has remained healthy, but recent new home sales may not signify strength in construction, as homebuilders eat through a fatty layer of excess inventory that remains from the days of housing strength.
President Bush is scheduled to speak in New York City on economic conditions, while former Clinton aides Robert Rubin, Alan Blinder and Lawrence Summers testify in Washington before the Joint Economic Committee on how to create prosperity for middle class America. Treasury Secretary Henry Paulson will testify to the Senate on economic and exchange rate policy this same day.
The earnings schedule for Wednesday includes Altria Group, Google, Time Warner, Boeing, Eli Lilly, Gilead Sciences, Dominion Resources and Starbucks.
In our view, Wednesday's news overshadows Thursday's data releases that might otherwise significantly impact the market. At 8:30 a.m. Thursday, December personal income and consumption will be posted. Bloomberg's consensus sees December personal income rising 0.5%, compared to a November increase of 0.3%. Consumption is seen increasing 0.7% in December, compared to a 0.5% rise in November. January ISM is scheduled for release at 10:00 a.m. EST, and the consensus view is for a measure of 51.8, compared to a December reading of 51.4, according to Bloomberg.
The long awaited oil production cut of 500,000 barrels a day is slated to begin on Thursday, but last week's announcement by the U.S. government that it would begin filling the strategic oil reserve, shed clarifying light on why OPEC remained so patient in the face of collapsing oil prices during January. Automakers will report January vehicle sales Thursday. Last week, data showed that Toyota narrowed the gap between it and GM to just 162,000 vehicles in 2006.
Challenger, Gray & Christmas will issue its report on January job cuts, but recent data has provided evidence of a continued healthy job market. Friday brings more important employment data. The earnings reporters for Thursday are Exxon Mobil, Comcast, Anheuser-Busch, St. Paul Travelers, Valero Energy, Marathon Oil, CVS, Boston Scientific, Raytheon and Apache Corp.
After an unexpected rock solid report showing 167,000 nonfarm jobs created in December, January nonfarm payrolls are seen increasing by 145,000 on Friday, according to Bloomberg. In the past, we have observed significant revisions to data provided by this report, so its reliability is somewhat questionable. Unemployment is seen mirroring December's rate of 4.5%. The most closely watched measure within the report, however, will be average hourly earnings. The Fed will want to see tame wage inflation, and the market will view any significant increase in wages threatening to interest rates and equity and bond markets. Average hourly earnings are seen increasing 0.3% according to Bloomberg.
December factory orders are set for release at 10:00 a.m. EST, with the consensus view for a rise of 1.8%. This report gives more complete information than the durable goods orders report of the prior week. Finally, the University of Michigan's report on January consumer sentiment is scheduled for Friday, and is seen measuring at approximately 97.7, versus a measure of 98.0 previously.
Chevron and Simon Property Group are scheduled to report earnings on Friday. We think it's worth noting that Tehran will host a meeting of the Non-Aligned Movement, during which Iran is expected to display its nuclear progress. We believe this effort is designed to instill confidence in the group that Iran can stand up to the pressure of the United States and Europe.