Although earnings news is going to predominate proceedings and influence market movement in the upcoming week, traders are still all ears for any development on Main Street. The interest stems primarily from the fact that recent optimism, which led traders to overlook the still-fragile economy and bid up stocks to over 2-month highs, is founded on hopes that the economy will soon see a turnaround and take a turn for the better, supported by the government's unstinted support and central bank's extraordinary moves.
Are we justified in expecting so? This of course is a tricky question to answer. Some of the recent positive economic readings are seen as a result of stimulus spending, the effects of which are unlikely to last long enough to support a sustained rebound. As the stimulus effects wear off, will the economy be left gaping at an abysmal pit without any recourse? A complete reversal to trend-like-growth or even seeing some semblance of a return to growth this year is seen as a remote possibility, although such a development cannot be ruled out completely.
The guarded outlook is primarily due to the kind of damage the current downturn has inflicted on the economy- almost all sectors are continuing to bleed and the weakness has been broad based. There is going to be more pain on the employment front, which could stifle consumer spending that has seen some resurgence in the first two months of the year, but has shown weakness in March. The manufacturing sector is yet to find a firm footing and is still in the contraction zone, as emphasized by the regional and national surveys.
According to Commerzbank, the U.S. economy will continue to shrink until late 2009, which would make the current recession one of the longest. The bank expects GDP to shrink by 4% in 2009 and the unemployment rate to rise to 11% by the year-end. On the other hand, Danske Bank calls for a mid-year stabilization and return to positive growth rates in the second half. The contention is based on the theory that recession normally ends 6-10 weeks after the peak in initial claims. There, the data is likely to be keenly watched to decide on a tentative timeline for a recovery.
Last week, the Commerce Department said retail sales declined in March compared to expectations of an increase. Most of the categories showed month-over-month declines, including motor vehicles and parts despite unit auto sales rising for the month. Economists attributed the slump to the abatement of incentives to push sales. However, the consolation is that private consumption hadn't been a significant drag on first quarter GDP due to a solid showing in the first two months of the year. That said, Commerzbank believes that the ongoing deterioration of the labor market, which impacts wage growth, and the need for private households to pay down debt will restrain consumption for the time being.
Some degree of consolation came from the New York Fed's manufacturing survey, which showed that the business conditions index improved significantly to -14.7 in April from -38.2 in March, marking the highest reading since September 2008. Although the inventories index dropped sharply to a record low, the new orders and the shipment indexes jumped to a little below the zero level. On a very positive note, the six-month outlook improved significantly, with the future general business conditions index rising to 33.1 in April from 3.1 in March.
A slowdown in the contraction of manufacturing activity was confirmed by the Philadelphia Fed's manufacturing survey. The manufacturing index of the survey rose 10.6 points to -24.4 in April. While the new orders index jumped 16 points to -24.3, the index of backlog of orders rose to its highest level since September 2008. Notwithstanding a 15-point increase in the employment index, it remained in negative territory at -40.2. The prices paid and the prices received indexes drifted down to record low levels. The 6-month outlook index rose sharply to 36.2 in April from 14.5 in March.
The housing sector is still on a bumpy road. Housing starts fell over 10% month-over-month in March to 510,000, with the bulk of the decline concentrated in multi-family starts following a very strong performance in February. February starts were revised down to 572,000 from the 583,000 reported initially. Building permits declined 9% to a record low, as both single-family and multi-family permits declined in the month. According to FTN Financial, builders are continuing to hold off on initiating new projects until the outstanding inventory glut shows signs of dissipating.
Supporting the claims of some economists that the housing market may be close to a bottom, the National Association of Homebuilders said its housing market index rose 5 points in March to 14. The March reading was the highest since October. All three sub-indexes improved, with the indexes for present conditions, future sales outlook and prospective buyers traffic rising in the month. Builder confidence has apparently benefited from record low mortgage rates and the advent of the spring season.
However, all was well on the pricing front, as revealed by the Labor Department's consumer price inflation report, which showed an unexpected 0.1% dip in consumer prices, rendering the annual rate to a negative 0.4%, marking the first negative reading since 1955. The main drag was energy prices, which slid 3%. However, this declining trend in energy prices is unlikely to be sustained in the coming months due to resurgence in energy prices in April. Core consumer prices received a shot in the arm from higher tobacco prices, which rose due to higher taxes. Owners-equivalent rent rose at a slightly faster 0.2% rate in March following a 0.1% increase in February. The bigger-than-expected increase in core consumer prices should keep deflation talk at bay.
Meanwhile, the Labor Department said producer prices fell 1.2% month-over-month in March and core producer prices remained flat. The decline was mainly due to a drop in energy and food prices.
Another disappointing report came in the form of the Federal Reserve's industrial production report, which showed a bigger-than-expected drop in output in March. Machinery production fell by 4.2%, computers/electronics output declined by 2.5% and mining output contracted by 3.2%, which together offset the impact of a 1.5% rise in auto and parts production and a 1.8% increase in utilities output. Capacity utilization dipped to 69.3% from 70.3% in the previous month, with the recent month's reading marking a record low.
The Fed's Beige Book released last week noted that five Federal districts reported a moderation in the degree of contraction, while several other districts reported stabilization in activity at low levels. Manufacturing activity was reported to be weaker in most districts and non-financial service activity continued to contract across the board. Although retail sales remained weak overall, some districts saw a slight improvement in sales. Real estate activity was also noted as weak, while tourism saw a mixed performance. The Beige Book also noted pricing pressure across the districts and declining employment activity.
The unfolding week has a very light economic calendar, but in terms of significance, it is still a key week that can shed more light into how the economic environment is panning out. The two housing market reports, namely the existing and new home sales reports for March are likely to the focus of attention in the week, especially due to the fact that some of the recent housing market readings have come in better than expected. Additionally, traders may keenly watch the durable goods orders report to see if the positive picture painted by recent economic readings has emboldened companies to consider investing in capital goods.
The Conference Board's leading indicators index for March and the regularly scheduled weekly oil inventory and jobless claims reports are the other reports that find their place in the economic calendar of the week. Some degree of importance may also be attached to the Fed speeches scheduled to be delivered during the week.
Durable goods orders are likely to dip following a rebound in February, with the thinking premised on the fact that the Institute for Supply Management's manufacturing index remains below the '50' level. Wachovia Securities believes that the outsized gains in machinery and technology equipment would reverse. Additionally, the decelerating order bookings for civilian aircraft do not bode well for the headline number. However, motor vehicle orders should see some strength, as auto plants have come back online now.
Existing home sales are most likely to remain flat, as a reduction in mortgage rates and the recent declines in home prices could support sales at current low levels. Research by the National Association of Realtors has shown that about 45% of recent house sales activity was either distress or foreclosure-related sales. If the efforts to modify existing mortgages gain traction in the next few months, reported sales could see sharp declines.
New home sales could continue to be pressured by difficult labor market conditions, economic concerns and mortgage market troubles despite the improvement in affordability we have been seeing of late due to depressed prices. That said, new house inventories should gradually return to more normal levels of the late 1990s, as declines in completions and general building activity reduce house supplies. New home sales for March are most likely to see a small decline, given the fact that homebuilder surveys suggested a slight improvement in builder confidence.
Chicago Federal Reserve President Charles Evans, a FOMC voting member, is scheduled to speak at 9 AM ET on Monday.
The Conference Board is scheduled to release a report on the U.S. leading index for March at 10 AM ET on Monday. The consensus estimate calls for a 0.2% decline in the leading indicators index for the month.
In February, the leading indicators index fell 0.4% month-over-month. The January reading is revised down to show a 0.1% increase from the 0.4% growth reported originally. The largest negative contributors were average weekly initial claims for unemployment insurance, stock prices, the index of consumer expectations and average weekly manufacturing hours. The lagging and the coincident indicators were down 0.1% and 0.7%, respectively.
Atlanta Federal Reserve President Dennis Lockhart, a FOMC voting member, is due to speak at 12:40 PM ET on Monday.
There are no key economic reports due to released on Tuesday.
Federal Reserve Vice Chairman Donald Kohn is scheduled to speak at 5:30 AM ET on Wednesday.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday.
The crude oil inventories report for the week ended April 10th showed that crude oil stockpiles rose by 5.6 million barrels to 366.7 million barrels. However, gasoline and distillate fuel inventories declined by 0.9 million barrels and 1.2 million barrels, respectively.
Refinery capacity utilization averaged 81.5% over the four weeks ended April 10th compared to 81.9% in the previous week. Notwithstanding the declines, inventory levels of both classes of fuels were above the upper limit of the average range. The demand side of the equation showed that gasoline demand over the four weeks ended April 10th declined 0.4% from the same period last year. Meanwhile, average distillate fuel demand over the four weeks ended April 10th was down 6.9% year-over-year.
Kansas Federal Reserve Bank President Thomas Hoenig, who is a non-voting member, is due to speak at 10 AM ET on Wednesday.
The Labor Department is due to release its customary weekly jobless claims report for the week ended April 18th at 8:30 AM ET on Thursday. Economists expect a climb in jobless claims to 630,000 in the week.
Initial jobless claims fell to 610,000 for the week ended April 11th, down 53,000 from the previous week's revised figure. The 4-week moving average for initial claims, a statistic that flattens out week-to-week fluctuations in the data, dipped 8,500 to a level of 651,000.
The number of people receiving ongoing unemployment help, a statistic known as continuing claims, rose above 6 million for the first time since the data have been kept. Continuing claims for the week ended April 4, the latest week for which the government has data, climbed 172,000 to a level of 6.022 million.
The National Association of Realtors is scheduled to release its report on existing home sales for March at 10 AM ET on the same day. Economists estimate existing home sales of 4.65 million for the month.
Existing home sales rose 5.1% in February to a seasonally adjusted annual rate of 4.72 million units. Condominium and cooperative sales rose 11.4% compared to a 4.4% rise in single-family existing home sales. Sales rose across all regions, with the Northeast leading in terms of sales growth by showing a 15.6% jump in sales. The months supply of new homes remained unchanged at 9.7 months, while the median selling price declined 15.5% year-over-year to $165,400, although it rose $600 from the previous month.
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 Friday. Economists look forward to a 1.2% decline in the durable goods orders for March
In February, new orders for manufactured durable goods rose 3.5% to $164.7 billion, with the bulk of the increase coming from strong performance by machinery orders. Shipments of durable goods slid 0.5% and unfilled orders tumbled 1.4%. Inventories were down 1.1%.
The Commerce Department is due to release its new home sales report for March at 10 AM ET on the same day. The consensus estimate calls for a decline in new homes sales to 340,000.
New home sales rose 4.7% in February to an annualized rate of 337,000. The months' supply of new homes fell to 12.2 months from 12.9 months in the previous month, while the median sales price of a new home declined to $200,900 in February from $206,800 in January. Annually, median new home sales prices were down 18.1%.
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