Monday, February 27, 2012

The weekend meeting of finance officials from the Group of 20 (G-20) countries deferred decision on further strengthening the IMF's financial contribution to the ongoing European rescue effort. The group  wants Europe to take the lead on strengthening the Euro-zone rescue fund before it will do its part. European leaders will be discussing the creation of a permanent rescue fund this week, but a final decision on that front well take some time to hammer out. The pressing issue in Europe this week will be implementation of the latest Greek bailout, which goes to a vote in front of the German parliament today.

On the home front, we have a busy economic calendar this week, with the second revision to the fourth quarter 2011 GDP reading coming out Wednesday morning. Given the relatively soft Retail Sales reading following the first release, I expect a modest negative revision to the GDP number. We will also be getting the monthly Manufacturing ISM survey and the Durable Goods report on Wednesday and Tuesday respectively. The expectation is for the ISM reading to modestly increase in February, the fourth consecutive monthly gain in this key indicator, highlighting a healthy manufacturing sector. Monthly readings on Construction Spending and Personal Income & Outlays, both due on Thursday, will give us a better lay of economic land.

The G-20 meeting was expected to consider the IMF's request to enhance its lending capacity to almost $1 Trillion by raising additional funding commitment of about $500 billion from its member countries. This additional IMF firepower was expected to complement the bulked up Euro-zone permanent rescue facility that will have €750 billion in funding at its disposal. The Euro-zone fund will combine left over funds from the existing EFSF fund and fresh contributions from member countries. Germany has been reluctant to commit funds to such an effort, but may not be able to drag its feet much longer following the G-20 call.

The expectation is that both the facilities will come into existence over the next few months. This will provide for a roughly $2 Trillion firewall that the Euro-zone countries can fall back on in case of need. This expectation, coupled with the second installment of the European Central Bank's second liquidity operation later this week, have helped calmed market nerves about Europe in recent days. 

On the earnings front, we got better than expected results from home-improvement retailer Lowe's ( LOW ) this morning. We also saw strong results from Home Depot ( HD ) in recent days and an overall air of optimism appears to be taking hold in the broader housing sector. We also have strong results from HSBC Holdings ( HBC ).

Sheraz Mian
Director of Research