- A tone of uncertainty overtook global markets this week, as investors contemplated the ambiguous growth outlook for 2012. Trading pivoted around the FOMC rate decision and press conference on Wednesday. The Fed once again moved the goal posts on its "extended period," saying that rates would remain low until late 2014 (recall that it was only last August when the Fed introduced the mid-2013 language). It also tempered its economic forecasts, warning of lower US GDP growth and higher unemployment rates over the next two years. PIMCO's Bill Gross called the FOMC's low rate pledge extension the equivalent to QE 2.5 and suggested that the Fed may be preparing additional easing to boot. Before the Fed move, the IMF lowered its 2012 global GDP forecast (to 3.3% v 4.0% prior) and IMF Chief Christine Lagarde warned that the global economy could be in danger of sliding into a "1930s moment." Data out on Friday showed that US GDP grew 2.8% in Q4, a sharp acceleration from the 1.8% in Q3 and the quickest pace since the second quarter of 2010, although still less than expected, and the quality of the growth was questioned as unsustainable inventory builds were a major contributor to the number. In Europe, negotiations between Greece and its private creditors were much in the news, and it appears that officials have set a final deadline of February 15th to announce a deal, with hopes that final details can be worked out this weekend. For the week the DJIA lost 0.5%, the NASDAQ gained 1.1%, and the S&P 500 was up less than 0.1%.
- About one-third of the DJIA components reported December quarter results this week. Caterpillar offered the strongest results of the bunch, bulldozing expectations and offering a very strong outlook for FY12. AT&T had the most fraught results, with a $6.7B quarterly loss largely from the breakup fee owed to Deutsche Telekom after the deal to acquire T-Mobile fell apart. Nevertheless, the company's iPhone sales were through the roof thanks to the new 4S model, and its other metrics held up well. Johnson & Johnson, McDonalds, 3M, United Technologies, Proctor & Gamble and Verizon offered solid, in-line results, including decent y/y profit and revenue growth, although executives at the companies offered cautious comments about the business outlook for 2012. Boeing's profits were well above par, thanks mostly to a one-time favorable tax settlement, but the firm's initial outlook for 2012 was weak. Proctor & Gamble warned that earnings will continue to be negatively affected by higher commodity costs and said it would consider lowering prices in some categories to take back market share. Travelers' profits fell as lower interest rates impaired the firm's earnings.
- In the oil patch, ConocoPhillips easily topped earnings estimates as profits grew more than 60% y/y. Revenue grew sharply as well, helped along by higher crude prices. Shares of Chevron fell after a disappointing Q4 report. It's not like the analyst community wasn't warned - back on Jan 11th, the company cautioned that earnings would be down significantly on a sequential basis. In any case, both earnings and revenue missed the mark by wide margins, and the firm's US downstream operation lost money. Oilfield services name Haliburton modestly topped consensus estimates in its Q4 report, and for the year reported a 57% gain in profits over 2010 levels.
- Automaker Ford's profits in Q4 were lower than expected, although earnings were up on a y/y basis. Ford's European unit posted a $190M loss due primarily to higher materials costs, while its Asia Pacific segment lost $83M related to the impact of flooding in Thailand.
- The Nasdaq outperformed other major US indices this week largely on the strength of Apple's Q1 results, with both earnings and revenue absolutely demolishing consensus expectations (earnings were up more than 50% y/y) and driving Apple shares to fresh all time highs. iPhone shipments also blew out expectations, at 37 million units, up 128% y/y. Apple itself even seemed surprised by the results, noting that sales of iOS devices were "stunning" and saying that customer demand was "off the charts" in the quarter. Netflix closed out its FY11 with a bang, crushing earnings and revenue expectations. However, the firm also warned that would see losses throughout FY12, with continuing attrition in its DVD subscriber base. Texas Instruments results were weak thanks to various charges associated with the National Semi acquisition and factory closures. Executive said the semi business would rebound in 2012, with a resumption of demand across a broad range of products and the inventory correction cycle bottoming out.
- Negotiations between the Greek government and its private creditors were a major focus this week. Talks between the two sides have been ongoing for months, and by Friday, the Greek finance minister stated that the final deadline for a deal was February 15th. At the Ecofin meeting on Tuesday, euro zone finance ministers hashed out the debt restructuring terms they could accept. Creditors, represented by the Institute of International Finance's (IIF) made their maximum offer, although the real outstanding issue was whether Greece would apply a collective action clause, which would force creditors to accept a write-down or whether the deal would remain "voluntary." The other major outstanding issue is the coupon on the new debt to be issued, while various legal issues are also seen as potential hurdles to an agreement. The talks stalled several times throughout the week, but optimism about the changes for a deal remained in place heading into the weekend. There is still plenty of skepticism about Greece, deal or no deal. German Chancellor Merkel said that she did not believe the existing multibillion dollar bailout coupled with austerity measures were working after two years of crisis. Meanwhile S&P's Chambers said that Greece would likely be downgraded to selective default in the first half of 2012, calling the move a matter of "when, not if."
- The FOMC post-rate decision statement determined the fate of the greenback this week. Analysts said that if the committee adopted inflation targeting, EUR/USD could retake the 1.3250 area, while no inflation targeting would provide the EUR/USD with momentum to test the low 1.2800's. The Fed explicitly committed itself to an inflation target with the decision, and EUR/USD was above 1.3200 by Friday. The extension of the extended period to 2014 didn't help the dollar, either, and by week's end the greenback was at one-month lows against the GBP and two-month lows against the CHF. Note also that euro short positions hit their fourth consecutive weekly high.
- The yen began the week on a softer note, aided by comments from BoJ Chief Shirakawa, who said he was still concerned about yen strength, causing the usual intervention jitters. The looming Japanese fiscal year-end could also be prompting Japanese life insurance investment adjustment activity. JPY continued it soft tone against the majors following the country's first annual trade deficit in over 30 years. Traders cautioned against reading too much of "competitive decline" into the trade figures, given Japan's current account remains in surplus. Nevertheless, many took it as a cue to unwind bullish bets on the Japanese currency.
- The Reserve Bank of New Zealand left its cash rate at 2.50% as expected, reiterating its concerns over the impact of the European debt crisis and uncertain global economic conditions. RBNZ also cut its assessment for inflation entrenched below 2% while pointing to the recent strength of NZD weighing on exporters, effectively deflating any outside chance of a rate hike over the medium term. In Australia, quarterly inflation metrics for Q4 were mixed, with headline CPI coming in flat but trimmed mean (core) metrics showing a surprising increase to 0.6% from 0.4% q/q. Inflation data makes the case for another RBA rate cut on February 7th slightly less certain, even though fixed income markets continued to price in an above-80% chance of a 3rd consecutive 25bps easing.
