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US Economics Week Ahead: Housing Side Story & A Special Election

January 15th, 2010 Michael McDonough

This week will primarily focus on earnings, with housing data acting as an intriguing side story. Companies expected to report earnings this week include: AMR Inc. (AMR), Bank of America (BAC), Citigroup (C), CSX (CSX), EBay (EBAY), GE (GE), Goldman-Sachs (GS), Google (GOOG) IBM (IBM), Morgan Stanley (MS), and Wells Fargo (WFC).

The housing side story will start on Tuesday with the release of the NAHB’s housing market index, which should come in relatively unchanged from last month.  On Wednesday attention will shift to housing starts/permits and MBA mortgage applications.  But, be aware, December’s cold weather may lead to a disappointing housing starts release.  If this does occur, then I recommend taking a look at the activity in new permits, which tends to be a forward looking indicator for starts—new permits rose 6% in November.  Other indicators to watch this week are Tuesday’s TIC data; Wednesday’s PPI release; and Thursday’s jobless claims, leading indicators and Philly Fed Survey.  The index of leading indicators should post its ninth consecutive month in positive territory.

Fed speak is non-existent this week ahead of the January 26-27 FOMC meeting, however, we could hear see some important headlines around Chairman Bernanke’s confirmation hearing.  His current term as Chairman is set to expire January 31st.  I anticipate that Bernanke will be reconfirmed, but any indications to the contrary have the potential to send ripples through the market.

Another key event this week will be Tuesday’s special election in Massachusetts to fill the seat of the late U.S. Sen. Edward Kennedy.  If the Republican candidate, Scott Brown, takes the election from Martha Coakley, then democrats lose their filibuster-proof, 60-seat majority in the U.S. Senate, potentially complicating the passage of healthcare reform. Scott Brown has indicated he is not in favor of the current reform, while interim Senator Paul Kirk—currently sitting in Kennedy’s old seat—would vote in favor of it.

However, I am no political pundit, but a Republican victory could prompt Democrats to expedite a vote on healthcare reform to exploit a gap between the special election and what would be Mr. Brown’s swearing in. From my understanding, the election cannot be certified until all absentee and military ballots are tallied, which I am told could take up to 10 days after the actual election–other sources have indicated Brown’s swearing in could be pushed back to as late as February 20th. To the outrage of some voters, this could award Democrats the opportunity to pass the reform while maintaining their filibuster proof majority. The bottom line here is a Republican victory in Massachusetts will likely lead to a political pickle. This is just something to think about while watching Tuesday’s results.

Here is the rest of this week’s US calendar:

Monday, Jan. 18

Holiday: All Markets Closed

Tuesday, Jan. 19

9:00 a.m. EST: November’s Treasury International Capital (TIC) Data (Risk: Neutral, Market Reaction: Marginal): This report highlights the flow of financial instruments to and from the U.S. It indicates foreign demand for U.S. financial instruments and thus tends to have a stronger impact on the dollar and the bond markets than it does on equities.  But, given the recent record levels for treasury auctions, it will be interesting to monitor foreign demand for US debt.

10:00 a.m. EST: January’s State Street Investor Confidence Index (Risk: Neutral, Market Reaction: Marginal): The State Street Investor’s Confidence Index measures investors’ tolerance to risk. According to the State Street report in December, “This month’s up-tick in global investor confidence stemmed largely from an improvement in the mood in Asia, where risk appetite rose to an eight-month high,” commented Froot. “Elsewhere portfolio reallocations were modest. With three of the four indices over the neutral level of 100, institutions are continuing to add to their risky asset positions, but at a slower pace than was evident earlier in the year. Investors will be watching for signs of renewed economic growth, and well-designed exit strategies from policy makers, before making more significant reallocations towards risk in 2010.”

1:00 p.m. EST: January’s Housing Market Index (Risk: Neutral, Market Reaction: Moderate): After receiving a boost from the original first time home buyer tax credit and the Fed’s MBS purchase program—to keep mortgage rates low—the HMI has been relatively flat , trending slightly down from September’s peak.  Concerns by builders regarding unemployment, consumer credit, and the eventual impact of the expiration of temporary government programs designed to bolster the sector will likely keep the HMI suppressed for the time being.  The current Bloomberg consensus forecast is for a reading of 17 in January compared to 16 in December; any reading below 50 indicates negative sentiment toward the sector.

Wednesday, Jan. 20

7:00 a.m. EST: MBA Mortgage Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tend to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.  Applications rose 14.3% last week after rising a modest 0.5% a week prior.  Refinance applications jumped 21.8%, while purchase applications rose just 0.8%.  A wave of buyers, filling out multiple mortgage applications, that were looking to take advantage of the first time home buyer tax credit–originally set to expire on Nov. 30th–have already completed their transactions, and have recently reduced the demand for mortgages.    However, the recent extension of the first time home buyer tax credit should eventually bring a new set of buyers into the market, which could help support the purchase index over the coming months.

7:45 a.m. EST: ICSC-Goldman Store Sales (Risk: Neutral, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales.  Last week’s number fell -3.0% compared to an increment of +1.5% a week prior.

8:30 a.m. EST: Housing Starts (Risk: Negative, Market Reaction: Significant): Given extremely cold weather across the country in December, I would not be surprised to see housing starts disappoint what I believe is an overly optimistic consensus forecast.  However, November’s data indicated a 6.0% rise in permits, which tends to be a good forward looking indicator for starts.  With this in mind, if starts disappoint, then it will be important to monitor any changes to permits data for indications of future strength. The current Bloomberg consensus forecast is calling for housing starts to rise to a seasonally adjusted annual rate of 579,000, compared to 574,000 in November. 

8:30 a.m. EST: December’s Producer Price Index (Risk: Neutral, Market Reaction: Moderate): The PPI surprised to the upside in November rising 1.8%, largely due to an increment in energy prices.  But, December’s PPI should show a very marginal change, with a modest decline even within the realm of possibility, especially after November’s large gain.  The current Bloomberg consensus forecast is for now change in the PPI, while the Core-PPI is anticipated to rise by 0.1%.  This release loses some importance since the CPI was already released last week.

8:55 a.m. EST: Redbook (Risk: Neutral, Market Reaction: Marginal): The Redbook is a weekly measurement of chain stores, discounters, and department store sales.  This indicator tends to be less significant than the ICSC-Goldman Store Sales in forecasting retail sales.  According to the Redbook store sales rose 1.4% last week on a yearly basis.

10:30 a.m. EST: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report measures US domestic petroleum inventories.  Large unanticipated swings in this index could have a significant impact on energy prices.  Last week this report showed an increase of 3.7 million barrels versus a rise of 1.3 million barrels a week prior.

Thursday, Jan. 21

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims rose 11K last week to 444K, after rising 1K a week prior.  The four week moving average improved to 440,750 from 449,750.  An improving trend in initial jobless claims are indicative of fewer job losses in the BLS’s monthly employment report; however, given the still elevated number of claims the job situation will get worse before it gets better.  The current Bloomberg consensus is for an initial jobless claims reading of 440K on Thursday.   Given the holidays—Martin Luther King Jr. Day this week—tricky seasonal adjustment factors can skew weekly claims data.

10:00 a.m. EST: December’s Leading Indicators (Risk: Neutral, Market Reaction: Moderate): December’s leading indicator index will likely show its 9th consecutive month of positive readings.  The current Bloomberg consensus forecast is expecting a +0.7% rise for the month, compared to a +0.9% increment in November.  The biggest positive contributions for the index will likely come from the yield curve, followed by initial jobless claims, and stock prices; while money supply is expected to be the largest negative factor.

10:00 a.m. EST: January’s Philly Fed Survey (Risk: Negative, Market Reaction: Significant): Recent weakness in the Philly Fed’s 6-month outlook index could translate into weakness for this month’s release.  The 6-month outlook index peaked in June at 60.1 and has since fallen to 24.4 in December.  Additionally, in December the survey’s new orders component fell to 6.5 from 14.8.  But, it should be noted that the New York Fed survey surprised to the upside last week, which could bode well for the Philly release.  The current Bloomberg consensus forecast is for a reading of 18.0, compared to 20.4 in December. 

10:30 a.m. EST: EIA Natural Gas Report (Risk: Neutral, Market Reaction: Moderate): This report highlights domestic natural gas inventories, which could have a significant impact on the energy sector.

4:30 p.m. EST: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness.  The market will pay close attention to the reserve bank credit component, which measures factors supplying   providing reserves into the banking system.  The Fed’s balance sheet rose to a record last week to US$2.274trn from US$2.216trn, on increased purchases of agency debt and mortgage backed securities.  The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt, and mortgage-backed securities to help moderate long-term interest rates.

Friday, Jan. 22

10:00 a.m. EST: State & Regional Unemployment Rates (Risk: Neutral, Market Reaction: Marginal): This data is unlikely to cause any market reaction, but will add details behind December’s employment report.

Enjoy the weekend!

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