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By Carlos Guillen

Equity markets are having another very volatile trading session, with the Dow Jones Industrial Average more than giving up all the encouraging gains from yesterday, as U.S. investors run with the European crowds that got spooked today by less than expected inflation. Data from here at home was ironically better than expected, but was unable to prevent the stampede on investors.

Over in Europe, equity markets took a hit after data showed inflation in the euro zone dropped to 0.7 percent in January from 0.8 percent in December, falling short of economists' estimate of 0.9 percent. The result was the lowest reading for the 18-nation euro zone in almost four years, and it has served to reignite fears that this disinflation can turn into deflation, which could derail the regions' economic recovery.

Here at home, somewhat mixed today was that personal income growth was worse than expected while consumption rose more forecasted. According to the Bureau of Economic Analysis, personal income during December was flat month-over-month but was worse than the Street's consensus estimate calling for a 0.2 percent month-over-month rise. Concurrently, personal consumption expenditures (PCE) increased by 0.4 percent, while economists' average forecast called for a 0.2 percent rise. As a result of no income growth while expenditures climbed, the savings rate declined from 4.3 to 3.9 percent.

Perhaps serving to counter the perception of slowing U.S. economic growth, data from ISM-Chicago showed that the region was expanding at a faster rate than expected. January Chicago PMI increased to 59.6 from the 57.0 level reached in the prior month, landing above the Street's consensus of 58.0. It should be noted that levels above 50 signify growth, so the result means that the region's manufacturing industry continues to remain in expansion mode. However, it should be noted that the pace of growth has been on a decline for three consecutive months. So far, regional manufacturing indicators have been rather mixed in terms of their direction; a broader measure of manufacturing comes out on tomorrow, and this should shed more light on the degree of growth in the U.S. economy.

Perhaps a bit encouraging today was that consumer sentiment landed better than expected, but there were several mixed aspects of the results. The University of Michigan's Consumer Sentiment January result landed at 81.2, higher than the Street's expectation of 80.4 and higher than the initial estimate of 80.4; however, it did decline from the 82.5 reached in December. Despite the better than expected overall figure, it should be noted that the most significant driver of the index was how consumers felt about current conditions, for expectations for the year ahead were much weaker. For those in lower income brackets, consumer spending will likely decline as the recent freezing temperatures will result in higher than normal heating bills in the near term. For those in the upper income bracket, the recent pull back in equity markets and the slowing gains in home values are also likely to reduce consumer spending.

As it stands, consumers' overall outlook declined. The expectations index decreased from 72.1 to 71.2, although it was an improvement from the prior estimate of 70.9. Nonetheless, half of all households expect no income increase during the year ahead, and just one-in-four consumers reported being better off financially than they were five years ago and expected their financial situation to improve during the next five years. In essence, consumers are just not seeing much of an improvement in their incomes or in the overall economy for the rest of the year. Part of the reason is that it is widely believed that there is no federal policy in place that will restore long term economic prosperity anytime soon.

In all, the worse than expected inflation data from the euro zone has caused investors to run for the sidelines, and although equity markets are off their lows, the Dow is still in losing territory by over 120 points.

German Consumer Conundrum
By David Urani

Over in Germany, the DAX index led the European markets lower with a 0.7% decline, as Destatis reported a surprise drop in retail spending in December. Retail sales were down 2.5% month to month, also accounting for a 2.4% year over year decline. This came as somewhat of a shock given that a number of previous data sets had been bullish for the German consumer, including record high consumer confidence, rising wages, lower unemployment and softened inflation.

In fact, it's so contradictory that some are saying the data is likely show something better when it gets revised next month. That's plausible, given that it's historically been a volatile data set. But even so, it's such a significant decline that it was bound to ring alarm bells. Meanwhile, the health of the German consumer must be put back into question for the time being.