The G20 meeting, a change in the 'mark-to-market ' accounting procedure and a few slightly better-than-expected readings made the week for the markets, as they continued to climb higher for the fourth consecutive week. Analysts and traders began to firmly call a bottom in economic activity. Is the market's faith well founded or is it fleeting? A more careful look at recent developments suggests that we may have reached an inflection point, which demarcates a rapid contraction and a contraction at a less rapid rate than previously.
Pointing to the recent weeks' positive readings, Danske Bank said these signs of life support its view that the economy is in the early stages of stabilization and will return to positive growth in the second half of the year.
That said, the non-farm payroll report released last week reinforced the weakness of the job market, with the March report showing a loss of 663,000 jobs. Additionally, the January reading was revised down to show a decline of 741,000 jobs in January. In March, job losses were broad based, with all sectors other than education and healthcare, showing employment declines. The manufacturing and construction sectors were the worst hit.
A taste of things to come by was revealed by the weekly jobless claims report, which showed that new claims continued to rose to a 26-year high in the week ended March 28th, and a private sector employment report, which showed steep job losses for March. While initial jobless claims rose to 669,000 from the previous week's upwardly revised 652,000. Continuing claims for the week ended March 21st rose to 5.728 million from 5.567 million in the previous week. The ADP's employment report showed that job losses in the private sector amounted to 742,000 in March, much higher than the forecast for a decrease of 663,000 jobs.
Manufacturing activity picked up from record low levels. The Institute for Supply Management's purchasing managers' index for March came in at 36.3, just above economists' expectation of 36. The new orders index rose by 8 points to 41.2 and the backlog of orders rose to 35.5, its highest level since September. While the production index remained almost unchanged, the employment index rose 2 points to 28.1.
This is despite the NAPM-Chicago manufacturing survey showing that the business barometer index slid 3 points to 31.4 in March, marking the lowest reading since 1980. The indexes of production and order backlogs fell 2 points and 8 points, respectively to 32.7 and 21.3. However, the new orders index rose 0.3 points to 30.9 and the employment index climbed 3 points to 28.1. At the same time, the prices paid index fell to 34.1 in March from 37.8 in February.
Some of the housing sector surveys gave room to some optimism. The National Association of Realtors pending home sales index rose 2.1% month-over-month in February. Notwithstanding the monthly increase, the index is still down 1.4% annually. Analysts attribute the monthly increase to the approach of the spring selling season and record mortgage rates. In another positive economic report, the Commerce Department said construction spending declined 0.9% month-over-month in February, far less than the 1.9% drop expected by economists. A 1.6% drop in private construction spending was partly offset by a 0.8% increase in public construction spending. Among private construction, single-family house construction slumped 10.9%, marking the 36th straight month of declines, while multi-family construction spending declined 2.1%.
However, the S&P Case/Shiller's house price survey showed that the 20 city composite home price index declined 18.97% year-over-year in January. All 20 cities saw year-over-year and month-over-month declines.
Meanwhile, the Conference Board's consumer confidence index rose to 26 in March from a record low of 25.3 in February. The reading came in below economists' expectations that called for a reading of 28. While the present situation index fell about 1 point, the expectations index rose 1.6 points, improving for the first time since November.
The unfolding week is a very quiet week on the economic calendar, both in terms of the number and the importance of the reports. The week is truncated due to the 'Good Friday' public holiday on Friday. Traders are likely to look forward to the minutes of the March FOMC meeting, the Commerce Department's trade balance report for February and the Labor Department's import and export prices report for March.
Some significance may also be attached to the Commerce Department's wholesale inventories report for February, the Federal Reserve's consumer credit report for February and the regularly scheduled weekly jobless claims and petroleum inventory reports. Analysts also note that market participants will keep an eye on the heavy Treasury funding schedule, with an estimated $59 billion in notes and inflation-indexed securities to be sold next week.
The trade balance report for February is expected to show a moderate widening in the trade deficit due to a pick up in the price of oil. However, trade is likely to remain weak due to the combined impact of the global recession and the global credit crunch.
Meanwhile, the Labor Department's import and export prices report is likely to show that import prices perked up to the strengthening of the dollar and an increase in crude oil prices. According to Wachovia Securities, the underlying trend is still downward despite the possible snapping of the seven-month declining trend.
Federal Reserve Governor Kevin Warsh is due to speak on Financial Markets in Washington at 1 PM ET on Monday.
The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET on Tuesday. Consumer credit for February is likely to show a decline of $1.5 billion.
In January, consumer credit rose by $1.8 billion to $2.56 trillion, as revolving credit rose by $0.9 billion to $0.96 trillion and non-revolving credit rose by $0.8 billion to $1.6 trillion.
The Commerce Department is due to release its wholesale inventories report at 10 AM ET on Wednesday. Economists expect wholesale inventories at the end of February to show a 0.6% decline.
Wholesale inventories at the end of January declined 0.7%, marking the fourth straight month of declines. The drop in inventories reflected large declines in automobile and computers in the durable goods category and drugs and groceries in the non-durable goods category. Wholesale sales fell a steeper 2.9%. Consequently, the wholesale inventories to sales ratio rose to 1.30 from 1.27, marking the highest since level since January 2002.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on the same day.
The petroleum inventory report for the week ended March 28th showed that crude oil stockpiles rose by 2.8 million barrels to 359.4 million barrels and were above the upper limit of the average range for this time of the year.
Gasoline inventories rose by 2.2 million barrels and distillate stockpiles rose by 0.3 million barrels. Both gasoline and distillate inventories were above the upper limit of the average range. Refinery capacity utilization averaged 82.1% over the four-weeks ended March 27th compared to 82.5% in the previous week. Gasoline fuel demand declined 0.2% in the four-weeks ended March 27th over the same period last year, while distillate fuel demand during the same period was down 9.1% from the year-ago period.
The Federal Reserve is scheduled to release the minutes of its March 17th-18th meeting at 2 PM ET on Wednesday.
Along with an announcement to keep interest rates unchanged at exceptionally low levels following its two-day FOMC meeting in March, the Fed said it would purchase $300 billion worth of longer-term securities over the next 6 months. Additionally, the Fed said it will buy an incremental $750 billion worth of mortgage-backed securities and $100 billion of government sponsored enterprises - GSE debt. The Fed also said it intends to add $100 billion to its purchases of agency debt.
The trade gap data for February is due out at 8:30 AM ET on Thursday. Economists estimate that the trade gap widened to $36.5 billion in the month. The trade gap measures the difference between imports and exports of both tangible goods and services.
The U.S. trade deficit narrowed to $36 billion in January from a revised deficit of $39.9 billion in December. Economists had estimated a narrowing in the deficit to $38 billion in the month.
The narrower deficit reflected a decline in exports, which in turn is seen as a corollary of slowing global growth, and a drop in imports. The January exports were down $7.6 billion to $124.91 billion, while imports fell $11.5 billion to $160.94 billion. The goods deficit fell $4.3 billion to $47 billion and the services surplus fell $0.4 billion to $10.9 billion.
The Labor Department is due to release its customary weekly jobless claims report for the week ended April 4th at 8:30 AM ET on the same day.
Jobless claims unexpectedly increased in the week ended March 28th compared to a downwardly revised reading for the previous week.
The report showed that jobless claims rose to 669,000 from the previous week's revised figure of 657,000. Economists had been expecting claims to edge down to 650,000 from the 652,000 originally reported for the previous week. The four-week average also rose 6,500 to 656,750
The export & import price indexes for March, which gives the changes in the prices of non-military goods and services traded between the U.S. and the rest of the world, are due out at 8:30 AM ET on the same day.
In February, import prices fell 0.2% from a revised 1.2% decline in the previous month. The decline reflected a 3.9% fall in petroleum import prices and a 0.6% drop in non-petroleum import prices. On a year-over-year basis, import prices were down 12.8%.
Export prices fell at a 0.1% rate in February compared to a 0.5% growth in January. Agricultural export prices fell 1.7% compared to a 0.1% increase in export prices of non-agricultural commodities. On a year-over-year basis, export prices declined 4.5%.
National Economic Council Director Lawrence Summers is scheduled to speak to the Economic Club of Washington at 12 PM on Thursday.
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