The stock market has been on the forefront of predicting a better year, with recent economic releases providing some support to Wall Street's optimism. And with more important data reports on the horizon, the markets won't waste any time getting back to business.
Stocks have made a good late-year run through December, bolstered by signs the economy may be at least stabilizing, if not on the verge of rebounding mightily. This week the market will look to the Institute for Supply Management's data (formerly NAPM), and the employment report for further confirmation that the worst might be over.
GETTING BETTER. The weekly MMS Survey of economists suggests modest improvement in both reports. However, as is typical with data, they will leave plenty of room open for interpretation. The ISM is expected to rise to 45.7 in December from 44.5 in November, while December nonfarm payrolls are expected to fall only 170,000, compared with a 331,000 drop in November. The jobless rate is seen jumping to 6.0% from 5.7%.
While bulls on the economy will note the improvement, bears will highlight the fact that the ISM remains mired below the 50 threshold. (Readings below 50 indicate that survey respondents still see the economy as contracting.) Other closely watched data will include vehicle sales, the ISM's non-manufacturing numbers, and jobless claims.
Expectations regarding future Fed policy moves remain highly debatable, according to MMS Survey results. Forecasts for the January 30 FOMC decision showed 9 out of 16 respondents looking for another quarter-point rate cut to bring the Fed funds target rate to 1.50%. But, the results for the March and May meetings showed 8 out of 15 projecting a 1.75% target rate. Whichever way you look at it, it is a tight call.
SMALL CHANCE. That is in contrast to the Fed funds futures market which reflects only a small probability, about 20% to 25%, that the FOMC eases policy again. But the May contract is pricing in about 50% to 60% risk that the Fed begins tightening by the spring. Robust data and the recovery in equities have been the catalysts for the pessimism in the futures market.
Meanwhile, some Fed watchers say the improvement in some data doesn't mitigate downside risks to the economy. Of concern is the increase in debt loads amidst rising unemployment and declining incomes, the lack of the hoped for second fiscal stimulus package, the rise in capital market yields, and the restraint from the strength in the dollar.
So while the markets might radiate optimism about a recovery, there is clearly still plenty to worry about. Rupert is a senior economist for Standard & Poor's Global Markets