Friday, September 30, 2011
The overall tone of news flow on this last day of the third quarter is on the negative side, which is perhaps a fitting send-off for an extremely tough quarter for the market. We have hot inflation readings from Europe and weak income growth in the U.S. At least we don’t have any negative headlines about Europe’s other problems this morning.
We got a modestly negative read from the August Personal Income and Outlays report this morning. Growth in Personal Income came in weaker than expected, while Outlays (or consumer spending) came inline with expectations. Consumer spending, which accounts for more than two thirds of the economy, increased at 0.2% in August, following the robust gains in July. The July gain was modestly revised downwards (0.7% vs. 0.8%).
While the negative read on the income side is disappointing, it is reassuring to see the spending level hold up, particularly given the confidence-sapping blows that the economy suffered in August. With spending data for the first two months of the third quarter now available, it appears that we will get a decent improvement in personal consumption expenditures (or consumer spending) in the third quarter GDP report. Thursday’s final revision to the second quarter GDP number showed significantly more momentum in spending than was initially reported in the first two takes.
The market will also be keeping an eye on the September Chicago PMI report coming out a little later. The expectation is for the index to modestly slip from the August level but stay firmly above 50. An inline or better reading on the Chicago PMI will build market expectations for the national manufacturing ISM report that comes out Monday. Historically, the Chicago PMI has done a better job of foretelling the national manufacturing ISM index than other regional reports.
In corporate news, Bank of America (BAC) is planning to charge a monthly fee of $5 on its debit card users as a means to offset the revenue lost due to new regulations.
New limits on debit-card swipe fees, which were finalized by the Fed in June and go into effect tomorrow, reduce the transaction fees that banks like Bank of America, Wells Fargo (WFC), J.P. Morgan (JPM) and Citi (C) receive from merchants by an average of about 45% to 24 cents per transaction. Bank of America estimates that this new rule will cause it a roughly $2 billion annual revenue hit. Industry wide, the new rules are expected to reduce related annual revenue by an estimated $6.6 billion.
The market dealt with a lot of uncertainties in the third quarter, with the European debt situation and the U.S. growth outlook as the two biggest drivers. As long as both of those issues remain unresolved, it will be unreasonable to expect better performance in the coming quarter. That said, I am happy that the third quarter is over.
Sheraz Mian
Director of Research
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