There was a ray of good economic news today as the gauge of future economic activity posted its strongest increase in 8 months.
Economists predict dire consequences if committee fails to reach agreement by midnight on Monday on how to reduce America's massive debt.
Here are the top financial stories of the day:
1) U.S. Stocks Finish Higher-From The Wall Street Journal
U.S. blue-chip stocks closed higher Friday, as investors weighed a potential proposal for future European bailouts with continued worries over Washington's debt talks.
The Dow Jones Industrial Average gained 25.43 points, or 0.22%, to 11796.16, after dropping nearly 400 points over the previous two sessions. The Standard & Poor's 500-stock index dropped 0.48 point, or 0.04%, to 1215.65. Utility and financial stocks rose, while technology and energy fell. The technology-oriented Nasdaq Composite fell 15.49 points, or 0.60%, to 2572.50.
Trading volume was light and stocks moved in a narrow range through much of the session. On the New York Stock Exchange, there were 17 advancing stocks for every 13 decliners. For Nasdaq names, market breadth was nearly split between advancing and declining stocks.
"You have this tug of war taking place in the market between the underlying domestic data and the crisis in Europe," said Mark Luschini, chief investment strategist at Janney Montgomery Scott. "If we had some relief on the European front, that would be the avenue for equities to move decently higher from here."
Traders pointed to potential positive developments over how European bailouts may be funded as a catalyst for Friday's action.
The notion that the International Monetary Fund may call on the European Central Bank to lend it money to finance bailouts is gaining traction, according to Dow Jones Newswires. If all parties agree, a deal could be announced at the Dec. 9 European Union summit.
"IMF firepower coupled with real structural reform in Europe would propel the U.S. stock market skyward in the intermediate term," said Seth Setrakian, co-head of trading at First New York Securities.
Investors also remained on edge regarding a lack of progress over Congress's so-called supercommittee on deficit reduction. Budget cuts are set to be decided by Wednesday.
"My biggest fear is the supercommittee comes out with some plan that has no guts to it whatsoever and people look at it as being totally impotent," said Daniel Genter, chief executive officer at RNC Genter Capital Management.
Hewlett-Packard led the Dow higher, rising 2.6%. The technology company said it will give activist shareholder Ralph Whitworth, co-founder of Relational Investors LLC, a seat on its board. Boeing gained 2.1%, while Walt Disney rose 1.4%. Weighing on the downside were Chevron, which fell 2.2%, and Microsoft, which declined 0.9%.
On the economic front, the Conference Board's index of leading economic indicators jumped last month, suggesting some momentum is building in the U.S. economy. The index rose 0.9%, which was ahead of economists' expectations.
But a slew of better-than-expected domestic economic reports this week have largely been overshadowed by worries in Europe.
European markets were slightly lower even as European Central Bank President Mario Draghi called for swift implementation of measures to combat the currency bloc's debt crisis. The Stoxx Europe 600 lost 0.8%.
Yields on 10-year Italian bonds were below the key 7% mark, and Spanish yields were off earlier highs.
Asian bourses were broadly lower, on the back of U.S. losses on Thursday.
Composite shed 1.9% and Japan's Nikkei Stock Average lost 1.2%.
Gold futures settled up 0.3% at $1725.10 an ounce, while crude oil futures fell 1.4% to $97.41 a barrel. The U.S. dollar fell sharply against the euro and Swiss franc and also declined against the yen.
In corporate news, shares of H.J. Heinz shed 3.3% after the ketchup maker reported fiscal second-quarter earnings that topped estimates but revenue that missed.
Salesforce.com slid 10% after the cloud-computing company reported fiscal third-quarter results that topped estimates, but indicated that current quarter earnings might fall short.
Marvell Technology jumped 6.5% after maker of chips and parts for hard-disk drives reported fiscal third-quarter earnings and revenue that declined from year-earlier levels but still beat expectations.
Nike inched 0.9% higher after the athletic-apparel giant increased its quarterly dividend by 16% to 36 cents a share.
Foot Locker's third-quarter earnings rose 27% as the athletic apparel and footwear chain booked higher sales and improved margins. Shares rose 2.6%.
Gap's fiscal third-quarter earnings fell 36% as the casual-apparel retailer's sales continued to slide and margins declined. The stock dropped 2.6%.
The U.S. economy may end 2011 growing at its fastest clip in 18 months as analysts increase their forecasts for the fourth quarter just a few months after a slowdown raised concern among investors.
Economists at JPMorgan Chase & Co. in New York now see gross domestic product rising 3 percent in the final quarter, up from a previous prediction of 2.5 percent. Macroeconomic Advisers in St. Louis increased its forecast to 3.2 percent from 2.9 percent at the start of November, while New York-based Morgan Stanley & Co. boosted its outlook to 3.5 percent from 3 percent.
Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, said he wouldn't be surprised to see fourth-quarter growth of 4 percent, though for now he is sticking with his forecast of 3 percent.
Strengthening Economy
The strengthening economy will help lift U.S. stock prices, which have been depressed by the sovereign debt crisis in Europe, LaVorgna said.
Futures on the Standard & Poor's 500 Index expiring in December rose 0.8 percent to 1,225 at 7:54 a.m. in New York. The benchmark Stoxx Europe 600 Index gained 0.1 percent to 234.23 at 12:34 p.m. in London. The yield on the 10-year Treasury note rose to 2 percent from 1.96 percent late yesterday.
There's too much pessimism built into the market, he said, adding that the Standard & Poor's 500 Index could break 1,300 by years end. The stock gauge closed at 1,216.13 yesterday.
The economic pick-up also may push up yields on Treasury securities, Herrmann said. The yield on the 10-year note could rise to 2.25 percent or higher in the first quarter of next year, he said, assuming Europe avoids a financial catastrophe akin to the 2008 bankruptcy of Lehman Brothers Holdings Inc. The 10-year yield stood at 1.96 percent at 5 p.m. New York time yesterday, according to Bloomberg Bond Trader prices.
Consumer Spending
Behind the revised fourth quarter forecasts: Consumers have not cut back on spending even with the turmoil in world financial markets, putting pressure on companies to rebuild inventories they ran down because of concerns about Europe.
Helped by the biggest jump in electronics purchases in two years, retail sales rose 0.5 percent in October, after a 1.1 percent increase the month before, according to the Commerce Department.
We feel confident that the momentum we have heading into the fourth quarter, combined with our holiday strategies, bode well for that quarter,said Karen Hoguet, chief financial officer for Cincinnati-based Macy's Inc., the second-biggest U.S. department-store chain. We'll have a spectacular Christmas,she added on a Nov. 9 conference call with analysts.
Companies, meanwhile, held their inventories little changed in September as sales climbed, the Commerce Department reported on Nov. 15. Businesses had enough goods on hand to last 1.27 months at Septembers sales pace, near the record low of 1.24 months reached earlier this year.
Manage Inventories
Retailers continue to manage their inventories very carefully,Harlan Kent, chief executive officer of Yankee Candle Co. Inc., which sells its products to retailers like Macys and Target Corp., said on a Nov. 10 call with investors. We are in good shape to quickly respond to replenishment orders and capitalize on any uptick in consumer demand.
Restocking will boost growth by 0.8 percentage points in the fourth quarter, according to JPMorgan Chase. In the third quarter, inventory changes reduced GDP by 1.1 percentage points. The economic outlook beyond the fourth quarter rests heavily on what policy makers do, both in Europe and the U.S., said Michael Feroli, JPMorgan Chase's chief U.S. economist.
The U.S. would not be able to escape the consequences of a blowup in Europe,Federal Reserve Chairman Ben S. Bernanke said in El Paso, Texas on Nov. 10. The world's financial markets are highly interconnected.
Fed's Dudley
Federal Reserve Bank of New York President William C. Dudley said in a speech yesterday that while recent economic reports have shown improvement, that shouldn't be a signal for the Fed to relax its efforts to boost the economy. Growth next year may be around 2.75 percent after somewhat more than 2.5 percent in the fourth quarter, he said.
Although the latest news on the U.S. economy is somewhat more encouraging than that from earlier in the year, we should not take much solace from that, he said. The U.S. economy continues to face several obstacles,including consumers cutting debt and caution by businesses.
We also continue to face significant downside risks, mostly related to the stress in the euro zone,Dudley said.
Financial Crisis
Euro-region policy makers are struggling to contain a financial crisis that started two years ago in Greece and which has now spread to Italy, the region's third-biggest economy with a debt of 1.9 trillion euros ($2.6 trillion).
In Washington, the focus has been on the deliberations of the Congressional supercommittee, which faces a Nov. 23 deadline to come up with measures to reduce the budget deficit by $1.2 trillion over 10 years.
What's more important for the economy in 2012 though is the fate of a number of stimulus measures, including a 2 percent cut in employee payroll taxes and extended unemployment benefits, that are due to expire at end year, Feroli said.
If Congress doesn't continue them, the drag from tightening fiscal policy could subtract 1.5 to 2 percentage points from GDP growth next year,the former Fed economist added in Nov. 10 note to clients.
Households would be particularly hit, as the payroll tax cut and extended unemployment benefits boosted their income by about $150 billion this year, according to Feroli.
Holiday Season
For now, consumer spending has been holding up as the crucial end-of-year holiday selling season gets underway.
The rise in retail sales last month prompted economists David Greenlaw and Ted Wieseman at Morgan Stanley to bump up their forecast for growth of household outlays in the fourth quarter to 2.7 percent from 2.2 percent. Personal consumption expenditures rose at an annualized rate of 2.4 percent in the third quarter, the fastest pace so far this year.
Economists are divided over what's behind the buoyancy of spending. David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto, ties it to a fall in the savings rate that they argue can't last. That rate dropped to 3.6 percent in September, the lowest level since the start of the last recession in December 2007.
Often Revised
Others like LaVorgna play down the significance of the drop in the savings rate, noting that it is a statistic that is frequently revised.
Feroli, too, cautioned against reading too much into the savings numbers and pointed to other reasons for the resilience of consumer expenditures.
Ebbing inflation is giving households more spending power. Consumer prices fell in October for the first time in four months, dropping 0.1 percent after a 0.3 percent rise in September, the Labor Department said on Nov. 16. Contributing to the fall was a 3.1 percent decline in gasoline prices.
Lower borrowing costs, courtesy of a flight into Treasury securities by investors fearful of developments in Europe and the Feds continued easy monetary policy, are also helping households.
The average rate for a 30-year fixed rate mortgage was 4 percent in the week ended Nov. 17, barely above the 3.94 percent record low hit last month, according to Freddie Mac.
Construction Permits
Housing construction permits climbed last month to their highest level since March 2010, according to Commerce Department data, as the near record-low mortgage rates lured some buyers into the market.
The future pace of consumer spending ultimately will be decided by the growth of household income, which in turn is tied to the health of the job market.
And there, Herrmann saw some reason to be optimistic. He forecast that private-sector payrolls would rise an average 160,000 per month for the rest of this year and by 200,000 per month in the first four months of 2012. Private payrolls increased 104,000 in October.
In a sign that the job market may be improving, claims for unemployment benefits dropped to their lowest level in seven months in the week ended Nov. 12, to 388,000, Labor Department figures released yesterday showed.
With Europe an albatross around our necks, the fact that the economy is firming and performing better than expected is really encouraging,said Omair Sharif, an economist at RBS Securities Inc. in Stamford, Connecticut.
3) Supercommittee failure could trigger US credit downgrade, economists warn-The Guardian
Economists are warning of dire consequences if US politicians fail to make progress this weekend in tense talks aimed at reducing America's massive deficit ahead of a Wednesday deadline.
The bi-partisan congressional super-committee is charged with drawing up plans for a $1.2tn reduction in the nation's deficit by the middle of next week. Failure to do so will trigger an automatic "sequester" that will make cuts of that size to defence and social welfare programmes starting in 2013.
But the two sides seem far from finding a solution after clashing over tax revenues.
While Wednesday is the official deadline for the supercommittee to report back, it has until Monday to tell the Congressional Budget Office about the impact any plan they send to Congress will have on the budget.
"Time is running out. What I can say is we are leaving no stone unturned, negotiations continue and we are looking to find a way. We recognise what's at stake and we're hoping to reach an agreement," Democrat committee member Chris Van Hollen told CNN Friday.
Failure to reach an agreement on what is essentially a small reduction on the deficit – just 0.7% of gross domestic product in 2013 – could trigger another rating's agency downgrade, warned economists including Paul Ashworth, chief North American economist at Capital Economics.
"With all this pressure to reach an agreement, it really doesn't look good if they can't find a solution,"said Ashworth.
He said that the US had much more serious problems that would need tackling first.
"The US is already spending 7% of GDP on Medicare and Medicaid [the government-run health schemes] and that will be up to 10-11% in the next two decades. Debt is on an unsustainable path, and if they can't reach an agreement on this, it doesn't look good for the future."
Ratings agency Standard & Poor's cited the "extremely difficult" political conditions in Washington when it made the controversial decision to downgrade its rating on US debt in August. The firm also put the US "on watch' implying further cuts could come.
Morgan Stanley analyst Christine Tan predicted earlier this month that there was now a one-in-three possibility of another downgrade.
"If the supercommittee fails to reach a $1.2tn deficit reduction deal, if such a deal relies more upon accounting changes than real deficit reduction, or if congressional action lessens the impact of the $1.2tn automatic trigger, we believe this could potentially provide S&P with a pretext to downgrade the US further from AA+ to AA," wrote Tan in a note to investors.
HSBC's chief economist, Kevin Logan, said a "procrastination" solution was now the most likely outcome, with an agreement that specifies targets for spending cuts and revenue increases but leaves the details to congressional committees.
Passing the the hard choices back to congressional committees would lead to "lengthy and heated battles over the US deficit throughout 2012, we believe. The rating agencies might be tolerant of this for a while, but failure to make clear progress could lead to downgrades of the US sovereign credit rating at some point next year," Logan said.
David Semmens, US economist at Standard Chartered, said: "I think they will be forced into action. If not the consequences will be long-lasting. Failure will further highlight the political deadlock in Washington. It's very important the the supercommittee sends a strong message to the markets that the US is getting its house in order."
Stock markets are already under pressure form the credit crisis now sweeping Europe and further signals of a lack of leadership in the US could have negative consequences for the markets, said Semmens.
One of the major sticking points facing the supercommittee is what to do with Bush-era tax cuts that are set to expire at the end of 2012. Republicans are against any agreement that does not extend current income-tax rates.
Democrats want them extended only for lower- and middle-income Americans. Extending all the Bush tax cuts would add about $3.7tn to the deficit over the next decade.
Like the automatic deficit cuts, the Bush-era tax cuts too will automatically expire unless an agreement is reached. Gus Faucher, director of macroeconomics at Moody's Analytics, said: "We will see deficit reductions whether the super committee makes an agreement or not."
He said the "level of enmity" between Republicans and Democrats did raise concern, but he expects that some agreement will be reached.
Quote of the Day from Dave Ramsey.com:
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