Weekly Economic Indicators: More Fiscal Cliff Talk

Anacapri cliff

Anacapri cliff (Photo credit: Wikipedia)

The schedule for the week of December 3th includes:

  • Monday:  PMI Manufacturing Index, ISM Mfg Index, Construction Spending, and James Bullard speaks
  • Tuesday:  Motor Vehicle Sales and ICSC-Goldman Store Sales
  • Wednesday:  MBA Purchase Applications, ADP Employment Report, Productivity and Costs, Factory Orders, and ISM Non-Mfg Index
  • Thursday:  Challenger Job-Cut Report, Initial Jobless Claims, and Fed Balance Sheet
  • Friday:  Monster Employment Index, Employment Situation, Consumer Sentiment, and Consumer Credit

This week, I spoke with Steve Grasso, Director of Institutional Sales at Stuart Frankel & Co., and frequent commentator on CNBC, about the economic calendar for next week.  Grasso will be focusing on the overall market, non-farm payrolls, weekly initial jobless claims, the fiscal cliff, and the trading floor buzz.  A complete list is included above.

Overall Market View

Grasso says the markets have been rallying on speculation a deal will get done on the fiscal cliff in Washington. The equity markets are positioning themselves for a compromise, at least in the short term. Grasso stressed entitlements need to be addressed and if a deal is not reached, he predicts a 10% selloff in equities. If the country goes off the cliff, automatic spending cuts, tax increases, and the defense budget will be slashed, affecting companies in all sectors in the economy.  Grasso said he would settle for any short term fix, although a long term solution would be better, and would be good news for the capital markets. He feels “the fiscal cliff is the real deal, we can’t go on printing money forever. Europe is what we will become if we don't get our fiscal house in order"

Non-Farm Payrolls and Weekly Jobless Claims

Grasso predicts hurricane Sandy and holiday season hiring will skew the jobs numbers, and the data will be difficult to interpret. He said we need to get back to a normal month to get a good reading on the employment situation and suggested February as a good benchmark. Grasso believes the reason the jobless claims have been stuck in the 300K plus range is because there has been a lack of growth. He said, if the Democrats get their way, they will raise taxes on the top income earners resulting in a 0.25% drop in GDP. If GDP is estimated to be stays in the 2% range, that 10% cut in the growth rate will severely affect job creation in the country.

Quantitative Easing

Additional QE seems to be back on the table. Grasso pointed out, since the implementation of QE3 in September “diminishing returns has become a fact not a premise.” Today the S&P 500 is lower than what it was before the Federal Reserve announced QE3 in September. He said any form of QE will be met with selling pressure from investors. QE’s main purpose was to pump up the equity market and while it has had a positive effect on the housing market due to low interest rates, it has not created the jobs intended.  He added that QE is not the answer. The public should also be aware of how important it is for rates to stay, “for every 1 percent rates rise it will cost an additional $100 billion extra to finance our debt.” Those numbers demand growth rates far superior than what economists are forecasting.

Trading Floor Buzz

Trading volumes are low and Grasso would like to see the individual investor return to the equity markets. He suggested one way to improve investor confidence is to work on building their trust. He pointed out, over 100 million people are in the stock market through 401K’s, mutual funds, or pension funds. Everyone has a vested interest, including unions, as all investors benefit from gains in the marketplace.

Grasso’s Gripe

Grasso said “this fiscal cliff debate is political theater, nothing more.“  He doesn’t believe all the talk is necessary.Of the $600B at stake between spending cuts and the Bush tax cuts, $400 billion is the Bush tax cuts.  By extending the Bush tax cuts it will prevent the economy from going into another recession. Conversely, by not extending the Bush tax cuts, economists agree it will reduce growth.  Growth should be our focus.

 

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