Although the not-so-bleak economic readings released in the recent past have sent economists scurrying to advance their recovery time frame forecast, not many are optimistic about seeing a quick turnaround in conditions. It is widely believed that the recession will last through this year and may extend its tentacles even into 2010, as there is no quick fix for the kind of the problem that have been plaguing the economy. Even after the recession ends, the pain is likely to persist and the economy could continue to struggle as it strives to find a firm footing.
The stress test results that stressed the markets for much of last week seems to have confirmed the fact that liquidity is not exactly the current issue, but the readiness of the banks to lend. While the Treasury announced last Friday that the U.S. banks in general had adequate capital to deal with the business cycle, it said the detailed stress test results would be released only by May 4th. Meanwhile, the Fed revealed the numbers used for the 'baseline scenario' and an 'alternative more adverse' scenario used for the stress tests.
Earnings from the financial sector, primarily the money center banks, suggested that bank funding and trading conditions remained supportive despite rising pressure from loan charge offs. Even as banks repair the damage with the ample support provided by the government, most sectors central to economic growth is still found languishing.
First Trust Advisors is of the view that consumer spending is likely to lead the recovery, primarily due to the fact that the current recession is characterized by a sudden and sharp decline in monetary policy. That said, labor market conditions, which have a major influence on consumer spending remain still fragile, with people bracing for a double-digit unemployment rate in the near term.
The more disconcerting aspect of the job losses is that the cutbacks are occurring among full time workers, which make the lay offs permanent in nature rather than temporary. Moreover, even the workforce that has managed to avoid layoffs has seen its income shrink due to reductions in the number of hours worked and bonus, commissions and other types of incentive compensation received.
The housing market reports released last week showed mixed results. The National Association of Realtors said existing home sales fell 3% month-over-month in March to a seasonally adjusted annual rate of 4.57 million. Economists had expected a less severe decline to 4.70 million units. Annually, existing home sales were down 7.1%. The median sales price of an existing home declined 12.4% from a year-ago to $175,200, although it increased from the previous month. While total inventories of existing homes for sale fell during the month, the supply of existing homes at the current sales pace rose to 9.8 months in March from 9.7 in February due to a slower pace of sales.
Meanwhile, new home sales fell a little less than expected in March, with the metric showing a 0.6% monthly drop to 356,000 units on an annualized basis compared to expectations of 337,000 units. The previous month's sales were revised up to 358,000 units from the originally reported 337,000.
While the durable goods orders for March showed a smaller-than-expected drop of 0.8%, the previous month's orders were revised up to show 2.1% growth compared to the initially estimated 3.4% growth. However, shipments of capital goods declined 1.7%, portending weak performance by business investment in the first quarter. Peter Boockvar, equity strategist for Miller Tabak, commented that if the order gains for the non-defense capital goods orders, excluding aircrafts, in March and February translate into shipments, then they could contribute to GDP growth.
The Conference Board said the leading indicators index fell 0.3% month-over-month in March following a 0.2% monthly drop in February. The largest negative contributors were building permits, stock prices and the index of supplier deliveries. On the other hand, real money supply and yield spread had a positive impact on the headline index.
The unfolding week, with a host of key economic reports and the FOMC meeting, is likely to be keenly watched by traders, who are extremely anxious about getting some clarity on the course of the economy. Along with the 2-day FOMC meeting ending on Wednesday, the Bureau of Economic Analysis' advance first quarter GDP report, the results of the Institute for Supply Management's manufacturing index for April, the BEA's personal income and outlays report for March and the weekly jobless claims report are likely to take the spotlight in the week.
Traders may also evince interest in the S&P Case-Shiller's home price index for February, the Conference Board's consumer confidence index for April, the NAPM-Chicago purchasing managers' index for April and the final reading of the Reuters/University of Michigan's consumer sentiment index for April. Apart from these, the Commerce Department's factory goods orders report for March, the Labor Department's employment cost index for the first quarter and the EIA's weekly oil inventory report are also due to be released in the week.
The Fed is mostly likely to retain its fed funds target rate at the record low of level of 0%-0.25% after holding it at the level in each of its first two meetings of this year. The Fed's focus now is on stabilizing the financial markets and stimulating the economy using quantitative tools and massive expansion of its balance sheet. State Street Global Advisors is of the view that the central bank is most likely to fine-tune the TALF, including a possible expansion into other more impaired credits than expanding its asset purchase program.
The advance first quarter GDP report is likely to show that the U.S. economy contracted for the third straight quarter, although at a slower rate than in the fourth quarter. If the prediction comes true, then the fourth quarter would likely have been the bleakest period in the current economic downturn. Wachovia Securities sees some support for growth from consumer spending, residential investment and exports. That said, business investment in structures is likely to see significant weakness in the first quarter and continue to contract well into 2010.
Going by the regional surveys released earlier in the month, the ISM's manufacturing index is expected to remain weak, while showing tentative signs of improvement. The weak reading is consistent with declines in industrial productions and loss of manufacturing jobs. The manufacturing sector is likely to remain under considerable pressure in the near term due to weak demand, capacity reductions and an inventory glut.
There are no important economic reports scheduled to be released on Monday.
The Federal Reserve Open Market Committee is scheduled to meet on Tuesday and Wednesday to discuss the near-term direction of monetary policy and the monetary policy-setting arm of the Fed will make an announcement at 2:15 PM ET on Wednesday. The Federal Monetary Policy Committee consists of seven Governors of the Federal Reserve Board and five Federal Reserve Bank Presidents.
At its two-day meeting in March, the Fed extended another lifeline to the famished financial sector in a bid to help them come out clean. Along with an announcement to keep interest rates unchanged at exceptionally low levels following the meeting, 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 S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S., is scheduled to be released at 9 AM on Tuesday. Economists expect an 18.8% year-over-year decline in the 20-city composite house price index for February.
The Conference Board is scheduled to release its consumer confidence report for April at about 10 am ET on the same day. The survey, which is based on a survey of 5,000 US households, is expected to show that the consumer confidence index rose to 28.8 in April.
The 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 Bureau of Economic Analysis is due to release its advance first quarter GDP report at 8:30 AM ET on Wednesday. The report is likely to show that the U.S. economy contracted by a 4.9% rate in the quarter.
In the fourth quarter, U.S. GDP shrank at an upwardly revised pace of 6.3% compared to a 0.5% real GDP decline in the third quarter. The contraction was not as worse as the 6.6% decline expected by economists. On a year-over-year basis, fourth quarter GDP declined by 0.8% compared to 0.7% growth in the third quarter.
The decline in fourth quarter GDP compared to the previous quarter reflected negative contributions from personal consumption expenditures, exports, equipment and software and residential fixed investment that were offset to some extent by positive contributions from federal government spending.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET the same day.
The weekly oil inventory report for the week ended April 17th showed that crude oil inventories rose by 3.9 million barrels to 370.9 million barrels. Crude oil stockpiles were now above the upper bound of the average range for this time of the year.
Gasoline stockpiles rose by 0.8 million barrels and were above the upper bound of the average range. Distillate inventories also rose, increasing by 2.7 million barrels, and were above the upper bound of the average range. Refinery capacity utilization averaged 81.8% over the four weeks ended April 17th compared to 81.5% in the previous week.
The Bureau of Economic Analysis is due to release its personal income & outlays report for March on Thursday. 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 declined 0.1% in the month.
Personal income declined 0.2% month-over-month in February. Economists had expected a 0.1% decline for the month. Personal spending rose 0.2%, in line with economists' expectations.
Spending on durable goods fell 1.3% in February after rising 3.1% in January, while spending on non-durable goods rose 0.8%. Spending on services edged up 0.1% in February after rising 0.3% in the previous month. The price consumption expenditure index rose at a 1.8% rate, slightly faster than the 1.6% rate in January.
The Labor Department is scheduled to release its report on the employment cost index for the first quarter at 8:30 AM ET on Thursday. The report sheds light on wages and salaries as well as benefits. The consensus estimates call for 0.5% increase in the employment cost index for the quarter.
In the fourth quarter, the employment cost index rose a seasonally adjusted 0.5% compared to the expected increase of 0.7%. Wages and salaries increased 0.5%, slower than the 0.7% rate in the previous quarter and benefits climbed by 0.4%.
The Labor Department is due to release its customary weekly jobless claims report for the week ended April 25th at 8:30 AM ET on the same day.
Initial jobless claims rose to 640,000 for the week ended April 18th, up 27,000 from the previous week's revised figure. Economists expected claims to increase to 639,000 from the originally reported figures of 610,000.
The 4-week moving average for initial claims, a statistic that flattens out week-to-week fluctuations, dipped 4,250 to a level of 651,000. The number of people receiving ongoing unemployment help, a statistic known as continuing claims, increased 93,000 to a level of 6.137 million.
The results of the National Association of Purchasing Management-Chicago's business survey for April are scheduled to be released at 9:45 AM ET on the same day. Economists expect the business barometer index based on the survey to come in at 34.
In March, the business barometer index slid 3 points to 31.4, 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.
Chairman of the President's Economic Recovery Advisory Board Paul Volcker and World Bank Chief Economist Justin Lin are due to participate in panel discussion on U.S.-China cooperation in the global crisis at a conference in Washington at 3:45 PM ET on Thursday.
Individual car and light duty truck manufacturers are scheduled to release their sales on Friday. These sales are a good indicator of the trend in consumer spending.
Treasury Secretary Tim Geithner is scheduled to take part in a dialogue at the U.S.-China conference in Washington at 8 AM ET on Friday. On the same day, St. Louis Federal Reserve President James Bullard is due to speak to the Arkansas Bankers Association in Hot Springs at 9:45 AM ET.
The final reading of the Reuters/University of Michigan's consumer sentiment index for April is due to be released at 10 AM ET on Friday. The report is expected to show that the consumer sentiment index edged down to 61.5 from the mid-month reading of 61.9.
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 38 for April.
The manufacturing 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.
The Commerce Department is due to release its report on factory goods orders for March at 10 AM ET on Friday. Orders for manufactured goods are likely to have decreased 0.7% in the month.
Last week, the Commerce Department said orders for durable goods fell 0.8% month-over-month to $161.2 billion in March, marking the seventh decline in the last eight months. Economists were looking for a 1.5% decline in the durable goods orders for March. Durable goods make up the bulk of the factory goods orders.
The decline was mainly due to a 1.4% drop in transportation equipment orders, which fell 1.4%. Shipments of durable goods slid 1.7% and unfilled orders tumbled 1.4%. Inventories were down 1.1%. Non-defense capital goods orders, excluding aircraft orders, rose 1.9% in March, adding to the 4.9% gain in the previous month.
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