Cross currents from Europe, a gaggle of Fed speakers and the start of the corporate earnings season combine to make the coming week a critical test for markets in the new year.
The European debt crisis will be a major focus as the leaders of Germany and France meet Monday. The euro may also stay under pressure as investors watch the outcome of bond auctions in Italy and Spain and await potential credit downgrades in the euro zone.
U.S. data, in the week ahead, includes important retail sales data, weekly jobless claims and consumer sentiment. Plus, more than a half dozen Fed speeches will keep traders speculating on whether the Fed could consider more easing. The Fed meets in the following week and has already disclosed plans for a new communications strategy but is not expected to announce more quantitative easing.
The coming week is also important because it is the official launch of the fourth quarter earnings season.
“This is the first time in this recovery, we’re going to see earnings growth falling to single digits,” said Gina Martin Adams, institutional equity strategist for Wells Fargo Securities.
“I think it’s going to be a volatile season. You’ve got three sectors that are expected to produce negative earnings growth. For the first time since the recovery, we’re producing negative earnings growth. I think it will be something of a wakeup call. We’ve been lulled by persistent earnings beats over the last couple of years,” she said.
There are just two major reports in the coming week, starting with Monday’s report from Alcoa , seen as the traditional kickoff of earnings season. On Friday, J.P. Morgan reports, and the real flood of earnings reports begins the week after.
The S&P 500 is expected to generate earnings growth of 7.8 percent, according to Thomson Reuters. The three major S&P sectors that are expected to see negative earnings growth are telecom, down 18.6 percent, materials, down 8.6 percent and utilities, down 3.2 percent, according to Thomson Reuters data.
“We think we’re going to have a pretty good earnings seasonbecause expectations have been ratcheted down so far,” said Brown Brothers Harriman strategist Andrew Burkly.
“As far as companies’ upside surprises, I think you’re going to get your typical 65 percent of companies surprising on the upside,” he said. That number had been more like 75 percent in recent quarters.
The Dow rose 1.2 percent in the past week, with most of its gains the result of a strong rally Tuesday. The Dow was at 12,359. The S&P 500 gained 1.6 percent for the week to 1277. Traders watch the first five trading days of the year to see what direction the market will go in January, and therefore the year.
Burkly said he watches the performance of the whole month of January as a guide for the year. “We had the Santa Claus rally. That’s typically a good sign for January and for the following year,” he said. Burkly expects the market to perform well in the first part of the year before facing bumps later in the year. Many analysts expect the reverse.
Adams said stocks could face difficulties in the next several weeks because of earnings and other events. “You have a lot of action with respect to the European bond market and people starting to get skittish in reaction to Europe … I think it’s going to be a tough couple of weeks. Nobody’s excited and there’s a high degree of skepticism,” she said, noting periods of heavy skepticism can also turn into positives.
Friday’s surprisingly good jobs report follows a series of better-than-expected data, but stocks ended the day mostly lower.
Adams said the market is beginning to focus on the potential for slowing in the first quarter.
December’s chain-store salesreports from retailerswere mixed Thursday, and the government's retail—sales number for December is expected to come in up 0.2 percent when it is reported Thursday.
“I think we’re going to get a decent retail-sales number. It won’t be gangbuster but it will be solid,” said RBS senior economist Michelle Girard. Girard said the data should continue to look good for the next several weeks but she does expect slowing.
After 3.5 percent or so growth in the fourth quarter, she expects growth in 2012 to be just 2 percent. “We’ve seen these periods where the numbers are getting better but we can’t sustain them,” she said.
The jobs reportFriday showed that 200,000 nonfarm payrolls were added in December and that the unemployment rate continued to slip to 8.5 percent, but Girard does not expect the recent rapid pace of decline in the unemployment rate to continue.
“It may not be the improvement you’ve seen over the last three months. It may be that you get the same improvement but it’s only over the next 11 months or 12 months,” she said. Economists expect the employment picture to improve slowly.
What Else to Watch
Europe will stay a central focus, and the meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy should bring more headlines on the debt crisis, but also possibly on the sanctions against Iran.
European officials are discussing putting an embargo on Iranian oil, and they are expected to make a decision by the end of the month. President Obama, meanwhile, signed legislation last week that puts sanctions on the Central Bank of Iran.
Treasury Secretary Timothy Geithner travels to China and Japan this week to discuss Iran and economic issues with leaders there.
Oil has been moving higher on rising tensions. Nymex crude gained 2.8 percent in the past week, to $101.56 per barrel.
Iran, meanwhile, has said it will conduct military exercises in the Strait of Hormuz, the narrow waterway through which about a third of the world’s seaborne crude travels.
The euro temporarily fell below 1.27 Friday, for the first time since September, 2010. The euro finished the week at 1.2719, down 1.9 percent.
“I’m not expecting a great deal from that Sarkozy-Merkel summit. They’re having lunch and a briefing afterwards,” said Brian Dolan of Forex.com. “The risk is they do disappoint and Merkel comes out and repeats her opposition to greater ECB (European Central Bank) involvement.”
The ECB itself meets later in the week, when it holds a rate meeting Thursday. It is not widely expected to take action at that meeting, but it is expected to cut rates later on.
Dolan said the euro may be reacting to the inevitability of a rate cut but its decline has been rapid. “We didn’t expect this rapid a drop in the euro to start the year,” he said.
Dolan said he is also watching Chinese data, when the trade balance is reported Tuesday morning and CPI is reported Friday.
What Else to Watch
Earnings: Alcoa, Schnitzer Steel
1240 pm Atlanta Fed President Dennis Lockhart on economy
0300 pm Consumer credit (Nov)
0730 am NFIB survey (Dec)
1000 am Wholesale trade (Nov)
1030 am San Francisco Fed President John Williams on economic forecast
1000 am JOLTS (Nov)
0100 pm Treasury auctions $32 billion 3-year notes
0110 pm Kansas City Fed President Esther George on economic outlook
Earnings: Chevron (interim report) , Lennar, Supervalu
0840 am Chicago Fed President Charles Evans on economy
0900 am Atlanta Fed’s Lockhart on economic outlook
1230 pm Philadelphia Fed President Charles Plosser on economic outlook
0100 pm Treasury auctions $21 billion 10-year notes
0200 pm Beige book
Earnings: Infosys, Shaw Communications
0830 am Initial jobless claims
0830 am Retail sales (Dec)
1000 am Business inventories
0100 pm Treasury’s 30-year auction
0200 pm Federal budget
Earnings: J.P. Morgan
0830 am International trade
0830 am Import prices
0955 am Consumer sentiment
1110 am Fed Gov. Elizabeth Duke on regulations and credit availability
1245 pm Richmond Fed President Jeffrey Lacker on economic outlook
0100 pm Chicago Fed’s Evans on economic outlook
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