World Week Ahead: Heading for a cliff

Monday 10th December 2012

As investors return to their screens in anticipation of the Federal Reserve's final meeting of the year, time is running short on a budget deal in the US.

On Friday, Wall Street received a boost from better-than-expected jobs data, which more than offset even more doom and gloom from House Republican leader John Boehner on the prospects of reaching a tax and spending accord.

Employment in the US advanced by a better than expected 146,000 in November, the Labor Department said. The unemployment rate dropped to 7.7 percent, the lowest in four years, as some people stopped looking for work. Economists had braced for a tougher report in the wake of Superstorm Sandy's late October devastation.

But there wasn't good news everywhere. Consumer confidence went south, according to the Thomson Reuters/University of Michigan preliminary index, also released on Friday. Sentiment for December dropped more than expected to 74.5 from 82.7 the previous month.

Sideways appeared to be the best description of where the US budget talks stood heading into the weekend. Boehner said on Friday that the White House had "wasted another week".

Investors will be eyeing a two-day meeting by Fed policy makers starting on Tuesday for fresh guidance on the outlook for the world's biggest economy and its stimulus efforts.

Operation Twist, in which the Fed buys longer-dated Treasuries and sells some of its shorter-dated ones in an effort to stimulate the economy by lowering longer-term borrowing costs, is scheduled to end this month.

"The real question is whether [the November jobs data] changes the Fed's attitude toward more stimulus. It doesn't remove the need for stimulus but might convince the Fed to opt for a smaller program," Kathy Lien, managing director of BK Asset Management in New York, told Reuters.

Some believe that if Republicans and Democrats fail to reach a budget deal in the coming days, the odds of triggering about US$600 billion in automatic tax increases and spending cuts on January 1 are significantly higher. The result: shares are in line for a hit.

"After the FOMC meeting, I think it's going to be downhill from there as worries about the fiscal cliff really take centre stage and prospects of a deal become less and less likely," Mohannad Aama, managing director of Beam Capital Management in New York, told Reuters. "I think we are likely to see an escalation in profit-taking ahead of tax rates going up next year."

Meanwhile, the US Treasury is scheduled to auction US$66 billion in Treasuries in the coming days. It is offering US$32 billion in three-year notes, US$21 billion in 10-year debt and US$13 billion in 30-year bonds.

Additional clues on the US economy will arrive in reports on international trade, retail sales as well as the producer price index and the consumer price index.

In the past five days, the Dow Jones Industrial Average climbed 1 percent, while the Standard & Poor's 500 Index eked out a 0.1 percent gain. The Nasdaq Composite Index, however, shed 0.4 percent for the week, dragged lower by a drop of almost 9 percent in Apple's shares.

In Europe, the Stoxx 600 Index rose 1.2 percent in the past five days.

BusinessDesk.co.nz

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