The week just passed was marked by the benign testimony of Fed Chairman Ben Bernanke before Congress. The grizzly Fed chief pacified a concerned market, providing his astute view that economic growth was likely easing at a satisfactory pace, while inflation would likely abate over time. He presented Goldilocks in all her stunning glory. The market responded appropriately, with three consecutive days of appreciation in the Dow.
The week was not without its share of concerning data though, as the annual pace of housing starts declined 14.3% in January alone, raising eyebrows and concern that the powerful housing market might still lead us into recession. In fact, housing starts were down 37.8%, year over year, a sharp downturn, and one threatening enough to again raise concern that it could send the economy into recession. The housing news was enough anyway to take the Fed inspired fire down a notch to a sizzle.
At the end of the week, some key inflationary data settled stomachs a bit, as the core PPI result showed that year over year producer prices had risen just 1.8%, below the Fed alarm threshold of 2.0%. The week ahead has the opportunity to provide the market with confirmation that prices are indeed coming into line, as the consumer price index is reported.
On Monday, markets in the U.S. and much of Asia will be closed, as Americans celebrate President's Day and the Chinese ring in the year of the pig. Ominous indeed for superstitious investor types, especially after the spirited rise of Chinese shares last year. Markets in China and Taiwan will be closed all week, while the South Korean market closes for just the day.
Condoleeza Rice met with Palestine's Mahmoud Abbas and Israel's Ehud Olmert today in Jerusalem, marking the first such meeting since Fatah and Hamas parties came to agreement on a unified structure. The meeting seemed to bear no fruit, as Rice concluded it with a solo ninety second press briefing without a Q&A session. One has to wonder if Rice is not in the region for a different purpose. Over the weekend, Syria's Assad traveled to Iran to meet with the Supreme Leader, after which the Ayatollah Khomeini issued the standard 'U.S. will not succeed in the Middle East' statement.
Tuesday will be chock full of corporate news. Headlining the slate, key housing and consumer health barometers Home Depot (NYSE:HD) and Wal-Mart (NYSE:WMT) are scheduled to report earnings for their respective fourth quarters. They’ll be reporting alongside Alltel Corp., Firstenergy, Genuine Parts and Hewlett-Packard.
The Consumer Analysts Group of New York kicks off its conference in Arizona, with Kraft, General Mills and ConAgra among early presenters. Individually, EDS will be holding an analyst meeting in New York, while Airbus is scheduled to outline its restructuring plan in Toulouse, France. Microsoft’s Bill Gates is scheduled to speak to the Canadian Chamber of Commerce in Ottawa on this day as well.
The only economic data release of note on Tuesday is the University of Michigan’s American Customer Satisfaction Index, but it is unlikely to impact the direction of stocks. Vice President Dick Cheney will meet with Japanese Prime Minister Shinzo Abe, where they will undoubtedly discuss the North Korean Sham, I mean deal, agreed to last week.
Wednesday will clearly be the most important day of this week, providing the market with critical economic news. January's Consumer Price Index is set for release at 8:30 a.m. EST, and the consensus of economists surveyed by Bloomberg sees a headline reading showing growth of just 0.1%, due to lower energy prices during the month. The market will be keen on seeing the Core CPI number, which excludes volatile food and energy prices, and the consensus sees Core CPI up just 0.2%. If this metric proves mild, this will provide confirmation of last week's data and news that indeed Goldilocks rules. We would expect the market to move strongly higher as a result.
A second key report could also move the market Wednesday. January Leading Indicators will be reported at 10:00 a.m., and the consensus of Bloomberg economists sees an increase of 0.2%. The combination of these reports could provide support to the Goldilocks case or contradict it completely or partially, and thus play a role in the direction of stocks. We anticipate a mild Core CPI result and leading indicators measure to add further support to the placid picture Bernanke is painting.
Hold on, there's more. The Fed releases the minutes from its January meeting on Wednesday. While the result of the meeting itself had a positive impact on equity markets, the contents of the minutes could have a completely different result. The Fed's brief statement following the meeting contained language referencing the ongoing risk that inflation could pose, and the fact that the Fed might have to act against it. Therefore, we expect the minutes to show hawkish discussion regarding inflation, and depending on the CPI measure, this could impact the market negatively on Wednesday.
Earlier in the day, the world will be focused on Japan, as the Bank of Japan ends its two-day meeting with its decision on interest rates. Short-term rates in Japan were recently at 0.25%. Following the decision, BOJ Governor Toshihiko Fukui will hold a news conference to discuss the Bank's decision. Recently, the European Central Bank has expressed concern about the depreciating yen, versus the euro, and we expect European markets will be hopeful for a rise in Japanese rates. Thus, this decision could impact European shares as much as those in Japan.
In other news, Fed Vice Chairman Donald Kohn will address a group in Washington. Kellogg Co. is scheduled to present at the Consumer Analyst Group of New York meeting in Arizona. The earnings report schedule for Wednesday includes Medco Health Solutions, TJX Companies, Analog Devices and Whole Foods Market.
With seemingly all the week's information compacted into Wednesday, Thursday's relative quiet should provide ample opportunity to digest the data. Noteworthy events scheduled for Thursday include a meeting of the European Central Bank. However, the ECB's congregation this time around is not planned to include a decision on interest rates. The Conference Board will post its Help-Wanted Advertising Index, but as we have noted in the past, the index is relatively useless these days as it does not include job postings on the net.
E*Trade Financial Corporation will hold an analysts day on Thursday, while separately, the Pacific Crest Digital Media and Entertainment Forum takes place in New York. Reporting earnings on Thursday, look for CMS Energy, Health Management Association, Keyspan, PG&E, Patterson Co., Safeway, Williams Co., Ensco International, Penney J.C., Newmont Mining, Sempra Energy, Chesapeake Energy, H&R Block and Intuit.
There's not much news on tap for Friday, outside of a couple key Fed representative appearances. Dallas Fed President Richard Fisher will address the U.S. economy in a global context, while San Francisco Fed President Janet Yellen addresses the economic outlook. Earnings reports are scheduled from Clear Channel Communications, Nicor, Inc. and Lowe's Company to round out the week.