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US stock market daily report (January 30, 2012, Monday)

During December, Americans cut back on spending and used their increase in wages to bolster their savings accounts. Consumer spending accounts for as much as 70% of U.S. economic activity and renewed caution by consumers is a double-edged sword - improving their savings while attributing to the sluggish economic growth with reduced spending. Spending would increase if wage growth found a way to increase, at a faster pace. According to government data, the income of U.S. workers jumped 0.5% in December to mark the biggest gain in nine months. The increase was fueled by a sizable increase in hiring. The money left over after taxes which is inflation-adjusted disposable income climbed 0.3%. Inflation-adjusted after-tax income rose only 0.9% for the year 2011 however, the amount was not enough to keep up with a 2.2% rise in personal spending. Spending in December fell slightly, off less than 0.1% as consumers appear to already have begun the process of paying down their debt loads. During November, the combination of higher income and lower spending allowed consumers to boost their savings rate to 4% from 3.5% - reversing a six-month decline. The savings rate however, remains well below last year’s level of 5.2. Expectations are for the U.S. economy to expand at a 2% clip in the Q1, down from an initially reported 2.8% in the final three months of 2011. The Q4 growth was somewhat less than expected owing to weaker spending. After Americans rebuild their savings, they will be in a better position to spend, later in 2012. Measured by PCE index, inflation edged up 0.1% in December, to put the increase in 2011 at 2.4%. After a big spike early last year, inflation has begun to moderate. Core PCE, which excludes volatile food and energy costs, rose 0.2% and for the full year, the core PCE rose 1.8%. Spending and income data for November remain unchanged and revised data showed both increased by 0.1%. The Federal Reserve uses the core PCE as a tool to help determine whether to raise or lower interest rates. The central bank prefers to keep inflation at 2% or below.

U.S. stocks were lower today, extending losses for the S&P 500 into a third trading session, after reports Greece would not accept outside oversight of its budget and as Portugal’s borrowing costs soared. Portugal bond yields continue to spike. With recent activity in Portugal, its seen the country will move to the front of the line for U.S. market participants.

According to a quarterly survey of the bank senior loan officers released Monday by the Federal Reserve, U.S. banks tightened standards for loans to their European counterparts in the last three months of 2011, increasing standards for the second straight quarter as the debt crisis continued. At the same time, U.S. banks reported that they had picked up business as European banks pulled back to rebuild their balance sheets. Overall, domestic banks reported that their lending standards had changed little over the past quarter. This is the second straight quarter of relatively little change in standards after several quarters of broad relaxation however, foreign banks reported that they had tightened their loan standards. The Fed survey found that demand for loans from small firms rose to its highest level since 2005.

Charles Plosser, president of the Philadelphia Federal Reserve Bank reported that the Federal Reserve may have to hike short-term interest rates before the end of this year. "If the economy evolves as I think it might," then a rate hike may be needed in 2012, Plosser said. The timing of his comment is at odds with the Federal Open Market Committee, which said in a statement that it expects to keep rates at current levels that are close to zero until late 2014. Plosser said many market participants don't understand that the 2014 date from the FOMC was not a firm commitment. "It is conditional on the state of the economy," Plosser said. Plosser forecast "continuous modest progress toward recovery," with economic growth averaging 3% in 2012 and 2013. He estimates that the unemployment rate could end the year below 8%.

The dollar rose against the euro and other major currencies Monday, regaining some of the ground lost last week, amid ongoing worries over Greece and the region’s sovereign-debt crisis and as European leaders gathered for the first summit meeting of 2012. Going into a summit meeting in Brussels, tensions between Greece and Germany were on the rise. Greek officials rejected a proposal by Germany, the largest European economy, to give the European Union veto power over Athens’s spending plans.