RTTNews - The tantalizing nature of the economic data points is creating extreme uncertainty and anxiety among traders. A few recent reports suggest that we may be close to an inflection point from where economic momentum will pick up speed and the economy will soon start gravitating towards a trajectory of sustainable recovery. That said, intermittently, we are receiving worrisome data as well that is questioning the veracity of claims that a 'V' shaped recovery is in the works.
Superficial number crunching may lead us into believing that all is going to be well after the turbulence the economy had gone through in the aftermath of the Lehman bankruptcy, which is considered as a watershed event in the current economic downturn that had its epicenter in the financial sector. In the U.S., recent housing data have been positive, and after moving up from depressed levels, manufacturing survey readings have slowly crawled into expansion zone in August. And added to these, depleted inventory levels hold a lot of promise for growth through the mechanism of an inventory build up.
Internationally, we saw Germany, France and Japan emerge from recession and China is going from strength to strength, although a few still express skepticism over the quality of growth there. The Asian nations are remaining a bulwark, shielding the global economy from an outright collapse.
Economic reports released from the euro zone regions last week were music to ears. An important German investor confidence survey showed that its index measuring confidence among investors climbed 16.6 points to 56.1 in August. Additionally, services activity in Europe's largest economy entered into expansion zone in August. At the same time, France, the second largest economy in the region, reported an unexpected increase in manufacturing activity.
Do those give enough reasons for a cheer? Notwithstanding the apparent optimism that is keeping the markets afloat, there are latent fears over whether the growth built on the back of benevolent government and central bank actions could be sustained when all the stimulus is withdrawn. The classic case has been the recent cash for clunkers program that led to a huge resurgence in auto sales, with the impact of the program so much so that automakers began clamoring about increased production and hiring.
However, the question that is unanswered is what happens when the program expires on August 24th? Does that bring the automakers back to square one? Such a development cannot be ruled out unless the government finds fresh ways of stimulating growth or consumers spending shows resurgence. Therefore, the job market is likely to be closely watched to see if it can stage a rebound to support the income levels of consumers. Additionally, global growth is another avenue that can keep growth ticking domestically.
Last week, the National Association of Homebuilders said its index measuring builder confidence rose 1 point to 18 in August and is currently at its highest level since June 2008. The index measuring sales expectations in the next six months rose 4 points and the index of prospective buyer traffic increased 3 points, while the current sales conditions index remained unchanged.
Also suggesting improvement was the existing home sales report for July, which showed an increase in existing home sales for the fourth straight month to an annualized unit rate of 5.24 million. The reading marked the highest reading since August 2007. The National Association of Realtors noted that about 30% of the existing homes were bought by first time buyers, who took advantage of the $8,000 tax credit, which is due to expire on November 30th.
The median sales prices of existing home sales were down 15.1% year-over-year. Sales showed a month-over-month increase in all regions, except the West. The supply of existing homes rose 280,000 to 4.091 million units, resulting in the months-supply remaining unchanged at 9.4.
Housing starts fell to 581,000 in July from 587,000 in June, with the decline centered on multi-family starts, which are mostly built by investors. Single-family starts in fact showed a modest increase, rising to their highest level since October 2008.
The manufacturing sector is emerging from the woods. The results of the two regional surveys released during the week suggested improvement in the sector. The Empire State manufacturing survey for August revealed that manufacturing conditions improve notably. The business conditions index rose to 12.1 in August from -0.6 in July, marking the first positive reading since November 2007. The new orders and the shipments indexes rose for the second straight month, while the order backlogs index remained negative, although was the least negative since October 2008.
Moreover, the Philadelphia Fed's survey showed that the region's business activity index rose to 4.2 in August from -7.5 in July. The reading marked the highest level since November 2007 and the first positive reading since October 2008. The new orders index rose 6 points to 4.2 and notwithstanding a 5 point-increase the backlog orders index was at -9.3. Suggesting that inventory correction may have been over, the inventories index rose to 0.3 from -15.4, while the employment index surged up 12.4 points to -12.9. The 6-month outlook index rose 5 points.
Meanwhile, the Labor Department's producer price inflation report showed that the producer price index fell 0.9% month-over-month in July, while economists had expected a mere 0.3% decline. The core rate showed 0.1% decline as opposed to expectations for a 0.1% increase.
On the job market front, the tidings continued to be one suggesting caution. First time claims for unemployment rose unexpectedly to 576,000. Continuing claims also rose. The data point portends a setback to the monthly non-farm payrolls numbers, which have been showing an improvement of late.
Also bordering on the positive was the leading indicators index of the Conference Board, which rose 0.6% in July, rising for the fourth straight month. Six of the ten indicators that make up the index showed month-over-month increases. The coincident index was flat in July, as gains in industrial production, real personal income and real business sales offset the decline in payroll employment.
The unfolding week's focus will be on the economic reports to confirm the thought that a recovery may materialize in the near future. The Conference Board's consumer confidence index, the Reuters/University of Michigan's consumer sentiment index, the weekly jobless claims report, the Commerce Department's durable goods orders and new home sales reports for July, will be on the radar, as traders anxiously await for clues that can improve visibility on the economic milieu.
Additionally, traders may also pay attention to the S&P Case-Shiller house price index for June, the Bureau of Economic Analysis' preliminary second quarter GDP report and the personal income and outlays report for July. The results of the Treasury auction of 2-year notes, 5-year notes and 7-year notes, scheduled for Tuesday, Wednesday and Thursday, respectively may also have significance from the point of view of the markets.
Durable goods orders are likely to rebound, as the economy shows signs of bottoming out. An economic rebound will result in a recovery in orders, as manufacturers and retailers rush to restock and idled production comes back on line to keep pace with the increase in sales. Although consumer demand hasn't picked up much in July, fairly robust export orders and the demand created by the cash for clunkers program should help in July.
New home sales for July is also expected to show an improvement, in line with the recent data points from the housing sector. That said, the extent to which the new homeowners tax credit is boosting sales will be an important issue to ponder due to the fact that if at all the incentive has had a significant effect on sales, we may see weakness after the credit expires in November.
Aided by higher rental income and transfer payments, personal income for July is expected to show a small growth. At the same time, personal spending may have received a boost from auto sales, which are likely to have offset bleak back-to-school sales. The savings rate may have ticked down, although it is expected to increase to 6% in 2010, as households repay debts.
There are no important economic report scheduled to be released on Monday.
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 a 16.40% year-over-year decline in the 20-city composite house price index for June.
The 20 city composite home price index declined 17.06% year-over-year in May compared to expectations for a 17.9% drop. However, on a monthly basis, the index rose for the first time since Jul 2006.
The Conference Board is scheduled to release its consumer confidence report for August at about 10 am ET on the same day. The report, which is based on a survey of 5,000 U.S. households, is expected to show that the consumer confidence index rose to 48 in August.
The consumer confidence index for July declined to 46.6 from 49.3 in June. Economists had expected a more modest decline to 49. The present situation as well as the expectations index declined. Much of the negativity was due to the difficult job market situation.
The Commerce Department is set to release its durable goods orders report, which gives the value of orders placed for goods designed to last for more than 3 years, at 8:30 AM ET on Wednesday. Economists look forward to a 3.2% increase in durable goods orders for July.
In June, new orders for manufactured durable goods fell 2.2% month-over-month to $159.1 billion following a 1.3% increase in May. Transportation equipment orders fell 13.2% and were primarily responsible for the decline in the headline number. Shipments of this category of goods eased 0.1% and unfilled orders as well as inventories declined 0.9% each.
The Commerce Department is also due to release its new home sales report for July at 10 AM ET on the same day. The consensus estimate calls for an increase in new homes sales to 390,000.
In June, new home sales rose 11% to a seasonally adjusted annual rate of 384,000 units. A 23% month-over-month increase in sales in the West can be explained by the $8,000 federal tax credit awarded to first time buyers and the $10,000 California tax credit for new homes. The median sales price of new homes fell 12% year-over-year to $206,200, while inventories, as measured by the months' supply of new homes at current sales rate, fell to 8.8 from 10.2 in the previous month.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on the same day.
The weekly oil inventory report showed that crude oil inventories declined by 8.4 million barrels to 343.6 million barrels in the week ended August 14th. Notwithstanding the steep decline, crude oil stockpiles remain above the upper boundary of the average range for this time of the year.
Gasoline inventories fell by 2.1 million barrels, but they were still in the upper half of the average range. Distillate stockpiles edged down by 0.7 million barrels, although stockpiles were above the upper boundary of the average range. Refinery capacity utilization averaged 84.1% over the four weeks ended August 14th compared to 84.6% in the previous week.
Atlanta Federal Reserve Bank President Dennis Lockhart is due to deliver a luncheon address to Chattanooga Area Chamber of Commerce in Chattanooga, Tennessee at 11 AM ET.
The Bureau of Economic Analysis is due to release its preliminary second quarter GDP report at 8:30 AM ET on Thursday. The report is likely to show that the U.S. economy contracted at a 1.4% rate in the quarter.
The advance estimates revealed that the U.S. economy shrank at a 1% rate in the second quarter compared to a downwardly revised 6.4% GDP decline in the first quarter. Economists had expected a sharper 1.5% GDP decline in the second quarter.
The decline in first quarter GDP reflected negative contributions from non-residential fixed investment, personal consumption expenditures, residential fixed investment, private inventory investment and exports. The weakness was offset to some extent by positive contributions from federal government spending and in state and local government spending. Imports, which are a deduction from GDP calculations, declined.
The Labor Department is due to release its customary weekly jobless claims report for the week ended August 23rd at 8:30 AM ET on Thursday.
First-time claims for unemployment benefits showed an unexpected increase in the week ended August 15th and continuing claims also rose.
The report showed that initial jobless claims rose to 576,000 from the previous week's revised figure of 561,000. Economists had been expecting jobless claims to edge down to 550,000 from the 558,000 originally reported for the previous week. Meanwhile, the continuing claims for the week ended August 8th rose 2,000 to 6.241 million.
St. Louis Federal Reserve Bank President James Bullard is scheduled to speak to the University of Arkansas MBA program in Little Rock at 5 PM ET.
The Bureau of Economic Analysis is due to release its personal income & outlays report for July on Friday. Economists estimate the report, which is due out at 8:30 AM ET, to show that personal income rose 1% and the personal spending increased 0.2% in the month.
Personal income declined 1.3% in June following a 1.3% increase in May. At the same time, personal spending climbed 0.4%, one-tenth of a percentage point more than what economists had expected. Taking away the impact of stimulus spending, personal income was down a mere 0.1%. Notwithstanding a 0.4% increase in personal spending, real spending declined 0.1%. The personal savings rate declined to a 4.8% rate from a revised 6.2% in May.
The Reuters/University of Michigan's final report on the consumer sentiment index for August is scheduled to be released at 9:55 AM ET on the same day. Consumer confidence is expected to rise in the month, with economists forecasting an increase in the index to 64.8 from the mid-month reading of 63.2, although it is expected to be lower than July's 66.
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