Lower Consumer Spending Data Dampens Mood in Pre-Market Activity

October 30, 2009 – The futures are indicating lower openings this morning for the broader markets as the Street reacts to the Commerce Department’s Consumer Spending report for September.

The Commerce Department reported that consumer spending contracted by the largest amount in nine months in September, by 0.5%. Personal incomes were unchanged, but wages and salaries were down by 0.2%. Personal savings as a percentage of disposable income was 3.3%.

The consumer spending data will dampen the Street’s outlook a bit with respect to the economic recovery. After all, consumers are expected to carry 70% of the economy, and with wages and salaries also declining, consumers will have less spending power.

Keep in mind that consumer spending was the key reason for enthusiasm in yesterday’s GDP report which showed the U.S. has emerged from recession. It accounts for 2.4% of the 3.5% number (Cash for Clunkers-driven auto purchases represented three-fifths of the consumption number).

The dollar is slightly stronger against the euro this morning with the euro trading at $1.4796. The dollar index remains over the $76 level at $76.15. The dollar has been buoyed lately by the view that the recession in the U.S. is officially over. However, debt continues to rise and is expected to continue to do so as the administration continues its stimulus plan. The fact is that absent the administration’s massive increase in debt spending/stimulus, the economy would be showing negative growth, and the question is whether the debt spending will be able to get the economy back on its firm enough ground to expand going forward as the debt spending inevitably has to taper off.

The national debt is now over $12 trillion. The amount of this debt held by the taxpayer is $7.7 trillion. This represents 92%and 59% of GDP, respectively and is not sustainable.

Gold is down $5 this morning to $1,042.10. From a more technical perspective, high-yield currencies have been struggling lately which has been cited as a reason for the weakness in gold. But generally, the rule of thumb with gold’s movement can be simply explained by movements in the dollar. The dollar moves higher, gold moves lower, and vice versa. We continue to think the massive expansion of debt being piled onto the nation’s balance sheet will continue to pressure the dollar, which should drive gold prices higher.

Oil prices are down $0.92 this morning to $78.95 but have been buoyed lately by the view that the U.S. is out of its recession and the global economies are also stabilizing. Another factor that will continue to impact the movement of oil is the dollar. A weaker dollar means higher commodities prices.

In terms of what we expect in today’s session, we are looking for stocks to open lower on the consumer spending data. This morning’s consumer confidence report on tap a bit later will also be influential in terms of the mood. We think the upside potential for stocks at current levels is a lot more limited than downside risk so would suggest that our readers maintain a defensive position, hedging against downside risk.