A trader at the Toronto Stock Exchange during a difficult dayCHRIS YOUNG
Optimism wrapped in a layer of caution best defines investor sentiment this week, as government and central banks move to manage the recovery and companies report growing revenue, profit and cash.
The U.S. Federal Reserve commandeered the spotlight last week when it raised the discount rate charged to banks, and this week the central bank will again drive sentiment. Chairman Ben Bernanke will spend three days on Capitol Hill to give Congress his views on the employment situation and stimulus requirements.
Stock markets needed time to digest the significance of the discount rate hike. Similar to their response to China's efforts to rein in bank lending by raising reserve requirements, investors initially feared a rise in interest rates was coming. But the discount rate is not the bank's main policy rate, and economists say a rise in lending costs is still months away.
Eric Lascelles, chief economics and rates strategist at TD Securities Inc., described the U.S. move as "the start of phasing out the Fed's temporary liquidity programs." He reiterated that the bank's key interest rate - the overnight federal funds rate - will likely remains at 0.25 per cent until the end of this year or the first quarter of 2011.
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Both the Fed's move to drain excess liquidity out of the financial system and China's decisions to tighten bank lending are now actually considered a sign of economic strength. Taking away emergency stimulus suggests that the recovery is kicking in, says Colin Cieszynski, a market analyst with CMC Markets Canada Inc.
At the same time, there is no sign of inflation heating up, a trend that would call for an increase in rates. In fact, the latest U.S. data shows that the core consumer price index fell last month fell for the first time since December, 1982.
Sovereign debt problems in Europe and the Middle East do still linger, however, and they may restrain stock market gains. But there is a growing sense that governments and markets will work their way through the crisis, Mr. Cieszynski says.
Individual retail investors, who as a group are historically the last to know what is really happening on the Street, have just begun to put their singed toes back into the markets. In January, deposits into equity funds grew for the first time since May, 2009, although moderately, adding $29.7-million, the Investment Funds Institute of Canada says.
Companies reporting this week include a host of major retailers: Nordstrom Inc., Home Depot Inc., Macy's Inc., Sears Holdings Corp., Target Corp., Saks Inc., Gap Inc., Rona Inc., and Safeway Inc. This data, next to the U.S. Conference Board's monthly survey of consumer attitudes on Tuesday and the University of Michigan's consumer survey on Friday, should give a clearer read on where the consumer is in this recovery.
With the Fed having such a strong voice this week, new economic data will not be taking centre-stage. But investors will be watching Thursday for U.S. monthly durable goods orders, a leading indicator of industrial output and capital spending. Economists are expecting a 1.4-per-cent rise, up from the 1.1-per-cent gain in December, which should give some support to equities.
On Friday, the U.S. releases GDP and existing home sales. And Ottawa will provide the current account deficit for the fourth quarter, which is expected to come in under $9-billion, a healthy drop from the record $13.1-billion reported for the third quarter.