The Week Ahead: More "QE", China Returns to State Spending, and Does this Range Finally Break? « Market Montage

There is very little to add to the technical outlook on the indexes as the markets remain in very narrow ranges and are simply churning on a day to day basis during December.  Other than a brief burst of buying in the last 30 minutes Friday (which was repeated Thursday – together generating 7 S&P poinsts) the S&P would have been down last week, but instead finished up 2 points.  The NASDAQ had a rough week, down over 1% –  heavily weighed by a horrid week in Apple.  But the larger picture remains one of a holding pattern as Friday's "good news" in the employment report was not enough to drive stocks up over key thresholds.  Perhaps this week's FOMC meeting will have the Pavlov dogs kick in their buying instincts.  Both bulls and bears have valid arguments on the technicals here, but obviously is that is accurate it means we're in a "flip a coin" moment on the intermediate term – it could go either way.

Over the weekend there was more Italian drama as current leader Monti said he would quit until once the 2013 budget was approved.  Of course the zombie like creature that is Berlusconi (he just never quits) is circling like a vulture and would love his old post back.  Looks like "bunga bunga" politics may be back.  If you have not been paying attention to European equities the major indexes have actually been on fire of late, leaving the S&P in the dust.

In China there was some positive news, and it actually may be legit, as the closely watched electricity usage figure improved.  Looks like China is once again going the infrastructure route, although it should be no surprise as the country outlined a plan for expansion in a John Candy like Planes, Trains, and Automobiles in the coming decade.  This also fits the pattern of the last ruling party letting the economy dump some in the waning hours of their watch, to make the new politicians look like white knights as things improve.

  • Industrial output, the key monthly measure of China's growth, rose 10.1% year-to-year in November, up from 9.6% in October and the strongest since March. Electricity production, a widely watched proxy for China's economic activity, accelerated to 7.9% growth from 6.4%.
  • China's improving economy puts the new leaders in a quandary. The old model continues to deliver growth but may not be sustainable. Change could undermine growth in the short term, by reducing investment spending, in the hope of creating a stronger foundation for the future.
  • For now, the main catalyst for growth is an increase in investment in infrastructure, especially public-transport projects. In the first 11 months of 2012, the National Development and Reform Commission—China's powerful government planner—has given the green light for 837 billion yuan ($134 billion) investment in 32 subway systems. That includes six entirely new systems.  Overall, China is starting work on, or extending, more than twice the 15 subway systems that exist in the U.S.
  • Other state transportation spending is also increasing. Investment in roads grew 36.8% year-to-year in November, from zero growth at the end of 2011, and railway spending has also accelerated.
  • In contrast, investment in the manufacturing sector dipped to 19.4% growth in November from 24.4% at the beginning of the year. That reflects caution by entrepreneurs faced with an uncertain outlook, rising costs, idle capacity, and high debts to repay from past investment.
  • The return to state-sponsored investment in 2012 is more moderate than in 2009, when the government responded to the slowdown in growth with a surge in bank lending for infrastructure and real-estate projects. While that stimulus spending helped China ride out the global financial crisis, it is blamed now for creating a real-estate bubble and the risk of rising bad debts.

Economic news in the U.S. is sparse this week, and the main event will be the (zzzz) Fed announcing an expansion of QE.  This new round will differ from Operation Twist as the latter is simply moving assets around on a balance sheet by duration, whereas it appears what they will do to replace Twist is the more traditional expansion of balance sheet i.e. purchases of bonds.  This is also the quarterly meeting where the Fed holds a news conference so some speculate the Fed may move to target dating i.e. "we'll go easy on money until unemployment drops below X% and inflation over Y%" rather than the traditional date targeting, but on that end the Fed may wait a few more months. Retail sales for November will be the other main report – expectation is for a 0.6% increase despite Sandy.  (You can't stop Americans from shopping no matter the conditions)

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