RTTNews - Last week, the yield curve became steeper, as the yield on the 10-year Treasury notes rose, primarily due to the Treasury's enormous issuance and inflation worries. The markets perceived it as a negative sign rather than as a sign of recovery. The rise in treasury yields has exerted upward pressure on mortgage rates, which in turn has reduced demand for refinancings and home purchases. The development served as a thorn in the flesh, just as the market is warming to the idea of a recovery in the making.

Wachovia Securities is of the view that the current expansionary policy has put upward pressure on interest rates. However, with the government's resolve to keep interest rates at near zero levels, bloated deficits have the potential to fuel up inflation. At the same time, the decline in bond prices has led to a resurgence in equities and commodities.

Housing data received last week was mixed, with the S&P-Case/Shiller home price survey showing that house prices fell 18.70% year-over-year in March, which was slightly worse than the expected drop of 18.40%. On a month-over-month basis, house prices were down a more modest 2.17%. All 20 cities surveyed showed annual declines.

Meanwhile, a National Association of Realtors report showed that existing home sales rose 2.9% to a seasonally adjusted annual rate of 4.68 million units in April compared to a revised reading of 4.55 million in March. The median price of existing homes rose to $170,200, up from $169,900 in March, but down 15.4% from a year-ago. Inventories measured in months' supply rose to 10.2 months from 9.6 months in the previous month. According to data from the association, about 45% of the sales were of distressed properties. The Mortgage Bankers Association said earlier in the day that mortgage applications fell 14.2% year-over-year in the recent reporting week.

Commerce Department said last week new home sales came in at a seasonally adjusted annual rate of 352,000 in April compared to the March rate of 351,000. Inventories measured in months of supply fell to 10.1 in April from 10.6 in March, while in absolute terms, new home inventories declined by 13k to 297,000, marking the lowest level since May 2001. The median sale price of new homes was down 1.9% year-over-year, but it was up 3.7% month-over-month.

Jobs data also offered some solace. The weekly jobless claims report showed that initial claims for unemployment benefits fell by 13,000 in the week ended May 23rd even as continuing claims rose to a fresh record of 6.79 million.

Consumers are slowly picking up their shreds after beaten black and blue by the recession. The fact was reflected by a resurgence in the consumer confidence readings released last week. The Conference Board's survey showed that the consumer confidence index jumped 14 points in May to 54.9, while economists had expected a more modest improvement to 42.6. While the present conditions index rose to 28.9 in May from 25.5 in the previous month, the expectations index climbed 21.3 points to 72.3, marking the highest reading since December 2007.

Towing in-line with the upbeat consumer mood suggested by the Conference Board's survey, the University of Michigan's consumer sentiment survey also indicated a revival in confidence. The headline consumer sentiment index rose 0.8 points from the mid-month reading to 68.7 compared to the April reading of 65.1. In both surveys, the driver was the expectations index, with the present conditions index reflecting the not-so-optimistic outlook of consumers towards the conditions prevailing now.

Although the durable goods orders report showed superficial strength, the inner details pointed towards a still-frail economy. The headline durable goods orders rose 1.9% month-over-month in April, while the month-ago reading was revised down to show a 2.1% decline from the 0.8% drop initially estimated. Shipments of non-defense capital goods orders, excluding aircrafts, were down 1.5% in April, suggesting that investment in machinery and equipment will subtract from GDP growth.

The preliminary first quarter GDP report did not spring in any surprise. The major change from the preliminary estimate was a downward revision to the cutback in inventories.

The unfolding week is a pretty hectic week on the economic calendar, with a couple of market moving reports due to be released in the week. The monthly non-farm payrolls report for May, the results of the ADP private employment survey, which is seen as a precursor to the Labor Department report due on Friday, the Bureau of Economic Analysis' personal income and outlays report for April and the results of the Institute for Supply Management's manufacturing and non-manufacturing surveys for May are likely to be closely watched by traders.

Additionally, market attention is likely to be vested on the motor vehicle sales for May, given the backdrop of General Motors' impending bankruptcy filing, the Commerce Department's construction spending report for April and the National Association of Realtors' pending home sales index for April. The Fed's consumer credit report and the Labor Department's final productivity & costs report for the first quarter and the regularly scheduled weekly jobless claims and oil inventory report may also receive some attention.

The rise of the continuing claims to fresh record highs and the continued increase in the unemployment rate offer little hopes for a turnaround in job market conditions. However, State Street Advisors expect the modest improvement evident in April employment to be sustained in May, although without further improvement thereon. The unemployment rate is expected to top 9% in May.

According to Wachovia Securities, personal income, especially disposable income, will rise significantly in April after falling for five straight months, as withholding tables are changed for the new tax provisions. Spending is also likely to climb, although at a slower pace. The highly cautious disposition among consumers is likely to keep personal savings rate relatively elevated.

The ISM's survey is likely to reveal another month of contraction. Although we have seen fledgling signs of recovery, the outlook for the manufacturing sector is still weak. Regional manufacturing surveys show that the sector is still in the contraction zone. However, a rebound in durable goods orders point towards the emergence of strength in the pipeline.

Monday

The Bureau of Economic Analysis is due to release its personal income & outlays report for April on Monday. Economists estimate the report, which is due out at 8:30 AM ET, to show that personal income fell 0.2% and the personal spending also declined 0.2% in the month.

In March, personal income declined 0.3% month-over-month in March. Economists had expected a 0.2% decline for the month. Personal spending fell 0.2%, slightly more than the 0.1% drop expected by economists.

Spending on durable goods fell 0.7% in March after declining 0.4% in February, while spending on non-durable goods dropped 0.8%. Spending on services edged up 0.1% in March after rising at the same rate in the previous month. The core price consumption expenditure index rose at a 1.8% year-over-year rate, the same rate in February.

Meanwhile, the labor Department said that the employment cost index rose a seasonally adjusted 0.3% compared to the expected increase of 0.5%. Wages and salaries increased 0.3%, slower than the 0.5% rate in the previous quarter and benefits climbed by 0.5%.

The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET on the same day. Economists expect the index to show a reading of 42 for May.

In April, the manufacturing sector continued to contract, although at a slower rate than in the previous month. The ISM's purchasing managers' index rose to 3.8 points to 40.1, with the indexes of new orders, production, employment, supplier deliveries, inventories and backlog of orders showing an improvement in the month from depressed levels. The prices index also rose 1 point to 32.

The Commerce Department's construction spending report to be released at 10 AM ET on Monday is expected to show a 1.8% decline in spending for April.

In March, construction spending edged up 0.3% month-over-month, marking the first increase in six months. The gain came amid a 1.1% increase in public construction, while private construction spending eased 0.1%. In the private construction category, spending on single-family home construction slumped 8.6% and multi-family home construction spending dropped 1.1%. Meanwhile, private non-residential construction spending rose 2.7% compared to the previous month.

Tuesday

Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET on Tuesday. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. The index is likely to remain unchanged in the month.

The pending home sales index for March rose 3.2% month-over-month, with the gains more pronounced in the high foreclosure areas of the South and the West. At the same time, the Northeast and the Midwest showed declines.

Wednesday

The ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 AM ET on Wednesday. The report is usually released two days prior to the Labor Department's employment report.

The Commerce Department is due to release its report on factory goods orders for April at 10 AM ET on the same day. Orders for manufactured goods are likely to have increased 0.3% in the month.

Factory goods orders for March showed that orders dipped 0.2% and shipments were down 1.2%. Unfilled orders and inventories also declining, dropping 1.5% and 0.8%, respectively. Meanwhile, durable goods orders, which make up the bulk of factory goods orders, saw a bigger-than-expected 1.9% advance in April, a report released by the Commerce Department showed this week.

The month-ago reading was revised down to show a 2.1% decline from the 0.8% drop initially estimated. Shipments of non-defense capital goods orders, excluding aircrafts, were down 1.5% in April, suggesting that investment in machinery and equipment will subtract from GDP growth.

The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM ET on the same day. The non-manufacturing index is likely to show a reading of 45 for May.

The services sector's purchasing managers' index rose 2.9 points to 43.7 in April. The business activity index rose 1.1 points to 45.2 compared to an 8.2 point-increase in the new orders index to 47. The index of backlog of orders rose 3 points to 44, while new export orders index climbed 9.5 points to 48.5. Imports staged a solid rebound, with the corresponding index surging up 11.5 points to 48.5.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET the same day.

Thursday

New York Federal Reserve Bank President William Dudley is due to speak to SIFMA conference on PPIP in New York on Thursday.

The Labor Department is due to release its customary weekly jobless claims report for the week ended May 29th at 8:30 AM ET on the same day.

Initial jobless claims came in at 623,000 for the week ended May 23. This was down 13,000 from a revised mark of 636,000 in the previous week. The 4-week moving average of initial claims, a statistic that flattens out week-to-week fluctuations in the data, dipped to 626,750 from the revised mark of 629,750 seen in the previous week.

Continuing claims, which measures the number of people receiving ongoing unemployment help, rose once again and set another record high. The statistic climbed 110,000 to 6.788 million.

The U.S. Labor Department is also scheduled to release its final report on first quarter non-farm productivity and unit labor costs at 8:30 AM on the same day. The consensus estimates call for a 1.2% increase in non-farm productivity and 2.9% growth in unit labor costs.

The preliminary report for the first quarter showed that non-farm productivity rose 0.8% following a 0.6% drop in the fourth quarter. The improvement in productivity reflected a 9% drop in hours, which more than offset the 8.2% decline in output. Hourly compensation rose 4.1% quarter-over-quarter compared to a 3.3% increase in unit labor costs.

Friday

The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM on Friday. The report sheds light on the number of paid employees working part time or full time in the nation's business and government establishments, the number of hours worked in the non-farm sector, the basic hourly rate for major industries and the number of unemployed as a percentage of the labor force. Economists estimate that the U.S. economy lost 550,000 jobs in May and look for an unemployment rate of 9.2%.

Non-farm payroll employment fell by 539,000 jobs in April following a revised decrease of 699,000 jobs in March. Economists had expected a decrease of about 600,000 jobs compared to the decrease of 663,000 originally reported for the previous month.

With the smaller than expected decrease, the total number of jobs lost since the recession began in December 2007 rose to 5.7 million. The continued decrease in jobs reflected notable declines in employment in both the good-producing and service-providing sectors. While goods-producing sectors lost 270,000 jobs, service-providing sectors lost 269,000 jobs.

At the same time, the Labor Department said that the unemployment rate rose to 8.9 percent in April from 8.5 percent in March. The increase, which lifted the unemployment rate to a new 25-year high, came in line with economist estimates.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET on the same day. Consumer credit for April is likely to show a decline of $6 billion.

Consumer credit fell by $11.1 billion, much bigger than the expected decline of $4 billion. Consumer credit had shown a decline in six of the past eight months.

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