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US Economics Week Ahead: Nothing’s Certain

January 23rd, 2010 Michael McDonough

Over the past two weeks new uncertainties have begun pouring into the markets, like the deluge of rain currently striking the west coast—I spent part of last week in Los Angeles.  However, unlike what’s happening over the west coast, the storms investors faced were mostly avoidable.   It all began with legitimate concerns over tightening Chinese monetary policy, but quickly moved to the avoidable with doubts over the reconfirmation of Chairman Bernanke, and the potential impact of President Obama’s imprudent policy agenda toward the financial sector.  Barring these uncertainties, this week’s full calendar of economic and earnings data should help shed some light on the health of the U.S. economy and the sustainability of the current recovery.

On the economic side, this week’s main event should be Wednesday’s FOMC announcement, where the fed should continue making incremental changes to the statement bringing us closer to tightening—which I still believe is a ways off.  However, the meeting may be trumped by news of Chairman Bernanke’s reconfirmation, which could take place as early as this week.  Despite what is turning into a bit of a political circus I do expect Mr. Bernanke will be reconfirmed.

Moving away from the Fed the market will be focusing on the first estimate of fourth quarter GDP on Friday, and critical housing data being released throughout the week.  GDP growth should exceed 4%, but many will argue over the sustainability of this growth, which is being heavily supported by accommodative fiscal and monetary policies.  Housing data will likely be mixed with December’s existing home sales coming under some pressure after the would-be expiration of the first time home buyer tax credit.

On the earnings front we should be hearing from almost a quarter of the S&P 500 with some big names including Amazon (AMZN), Apple (AAPL), AT&T (T), Boeing (BA), Caterpillar (CAT), Chevron (CVX), and Raytheon (RTN), Research In Motion (RIMM),Verizon (VZ), Yahoo (YHOO).  Other items that will likely drive headlines this week include President Obama’s State of The Union Address, the World Economic Forum in Davos, and an Apple product release (a tablet computer?).  Finally, the central banks of Japan (Monday & Tuesday) and New Zealand (Thursday) are schedule to meet next week, and could drive some headlines

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

Monday, Jan. 25

10:00 a.m. EST: December’s Existing Home Sales (Risk: Negative, Market Reaction: Significant): What would have been the expiration of the first time home buyer tax credit in November could place some downward pressure on December’s existing home sales.  The original rush of home buyers, looking to take advantage of what was an expiring program, have already finished their purchases.  The extension/expiration of the program should eventually help stoke sales, but there will likely be a delay before a new group of home buyers enters the market.  I should also note that increased foreclosure activity during the month, combined with what I anticipate will be weak sales, could increase the inventory of homes for sales.  I expect we could also see some weakness in existing home values.  The current Bloomberg consensus forecast is for existing home sales to decline to 6.1 million in December from 6.5 million a month prior.  Recently, home buyers have been more enticed to purchase existing homes over new homes as they tend to be generally cheaper.  I should also note that the index of pending home sales plunged -16.0% in November, which is an ominous sign.

10:30 a.m. EST: January’s Dallas Fed’s Texas Manufacturing Outlook (Risk: Neutral, Market Reaction: Marginal): This index is not highly publicized, but tracks manufacturing activity within the Dallas Feds jurisdiction.  Last month’s survey suggested, “Texas factory activity was flat in December…. The production index, a key indicator of state manufacturing conditions, came in close to zero in December, suggesting output held steady after growing in November for the first time since July 2008.  All indexes for future activity strengthened substantially in December, suggesting a more upbeat six-month outlook. The majority of respondents expect increases in production, new orders and shipments in the next six months. The future business activity index climbed to its highest level in nearly three years, and 41%”

Tuesday, Jan. 26

FOMC Meeting Begins

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 rose 2.0% compared to a drop of -3.0% a week prior.

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 0.9% last week on a yearly basis.

9:00 a.m. EST: November’s S&P Case Shiller Home Price Index (Risk: Neutral, Market Reaction: Moderate): It will be interesting to see what impact the would-be expiration of the first time home buyer tax credit will have on November’s housing prices.  Will sellers looking to sell their homes prior to the expiration have lowered prices or would a surge of buyers on the market help buoy home prices?  In October the Case Shiller Home Price Index ended five consecutive months of gains, lending some credence to the argument home sellers be lowering prices to liquidate their homes.

10:00 a.m. EST: January’s Consumer Confidence (Risk: Neutral, Market Reaction: Moderate): Consumers continue to face a barrage of headwinds and tailwinds, which makes forecasting a rather volatile consumer confidence index a tough task.  Nevertheless, I anticipate that tailwinds will have a slight edge this month marginally pushing up the index.  The current Bloomberg consensus forecast is for a reading of 53.5, versus 52.9 in December.  Most of this index’s strength has been coming from its expectations component, while the present conditions index has moved back near interim lows.  This index tends to be closely correlated with ABC News comfort index and the Reuters/University of Michigan consumer sentiment index.

10:00 a.m. EST: November’s FHFA House Price Index (Risk: Neutral, Market Reaction: Marginal): Unlike the Case Shiller Index the FHFA House Price Index rose by 0.6% on a monthly basis in November.  However, like the Case Shiller Index, it will be interesting to monitor what impact the would-be expiration of the first time home buyer tax credit will have on November’s housing prices.

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.”

10:00 a.m. EST: January’s Richmond Fed’s Survey of Manufacturing (Risk: Neutral, Market Reaction: Marginal): The survey hit a soft patch last month after seven months of expansion.  According to the report, “Manufacturing activity in the central Atlantic region pulled back in December from positive territory after expanding during the previous seven months, according to the Richmond Fed’s latest survey. All broad indicators of activity — shipments, new orders and employment — landed in negative territory. Most other indicators also suggested additional softness. Capacity utilization turned negative following seven months of improvement, while backlogs held steady. Vendor delivery times were virtually unchanged, while manufacturers reported slightly quicker growth in inventories.”

Wednesday, Jan. 27

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 9.1% last week after rising 14.3% a week prior.  Refinance applications jumped 10.7%, while purchase applications rose 4.4%.  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.   The 4wk moving average of all mortgages was down 1% through the week of January 15th.

10:00 a.m. EST: December’s New Home Sales (Risk: Negative, Market Reaction: Significant): Unlike, existing home sales, new home sales could experience a bit of a bounce in December after several months of relatively low readings.  However, the sharp drop-off in pending home sales(-16% in November) combined with what would have been the expiration of the first time home buyer tax credit could place some pressure on the index, despite a rather optimistic consensus forecast.  It is true that the tax credit had a larger impacted on existing, but I anticipate there should be at least a marginal impact.  The current Bloomberg consensus forecast for new home sales is 372K in December, versus 355K in November.

10:00 a.m. EST: December’s Mass Layoff Activity (Risk: Neutral, Market Reaction: Marginal): This data from the BLS will likely continue to show that mass layoff activity is subsiding.

10:00 a.m. EST: Timothy Geithner, the U.S. Treasury Secretary, testifies before House Oversignt Committee on AIG

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’s report showed a decline of -0.4 million barrels versus a rise of 3.7 million barrels a week prior.

2:15 p.m. EST: FOMC Announcement (Risk: Neutral, Market Reaction: Significant): It is hard to say whether the outcome of this meeting or the situation around Mr. Bernanke’s reconfirmation will garner more headlines in the press.  With that said I expect no change in policy, and nothing more than incremental changes to the FOMC’s statement (i.e. acknowledging recent improvements and highlighting risks).  I should also note that given this is the first meeting of 2010 the Fed will have a new voting rotation.  For those interested the new voters will be Boston’s Eric Rosengren, Cleveland’s Sandra Pianalto, St. Louis’ James Bullard, and Kansas City’s Thomas Hoenig.  As a side note, if Chairman Bernanke was not to be reconfirmed and Vice-Chairman Donald Kohn was to take his place, Kohn’s term is set for renewal by President Obama in June, which in theory could create another circus.  I personally expect Mr. Bernanke will be reconfirmed, but sadly I don’t have a vote.

9:00 p.m. EST: President Obama delivers his State of the Union Address to Congress

Thursday, Jan. 28

8:30 a.m. EST: December’s Durable Goods Orders (Risk: Neutral, Market Reaction: Moderate): Stronger aircraft orders during the month should help bolster the index after rising 0.2% in November.  The current Bloomberg consensus is for an increase in December’s durable goods orders of 2.0%—I believe this may be slightly optimistic.

8:30 a.m. EST: December’s Chicago Fed National Activity Index (Risk: Neutral, Market Reaction: Marginal): The CFNAI is an index consisting of 85 separate data sets designed to encompass national economic activity and inflationary pressure. A reading of 0 indicates the economy is growing at the historical trend while a negative or positive result indicates the economy is growing below or above its historical average, respectively. Given the volatile nature of this index, the three-month moving average is typically quoted. This index remains somewhat obscure in the mainstream media and is likely to have a minimal impact on trading. This index has been generally trending up over the preceding ten months, and could show a marginal improvement in December from its reading of -0.32 in November.

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims rose an unexpected 36K last week to 482K, after rising 11K a week prior.  The four week moving average rose to 448,250 from 440,750.  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.

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.

11:00 a.m. EST: Kansas City Fed’s Manufacturing Survey (Risk: Neutral, Market Reaction: Marginal): Manufacturing growth remained positive, but moderate somewhat in the region in December.  According to the survey, “Growth in Tenth District manufacturing activity moderated somewhat in December, and producers were slightly less optimistic about the months ahead, with few planning major capital expenditures. Price indexes remained mostly stable.”

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 fell from a record $2.274 trillion to $2.233 trillion last week.  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. 29

8:30 a.m. EST: First Estimate 4Q09 GDP (Risk: Neutral, Market Reaction: Significant): The current Bloomberg Consensus forecast is for fourth quarter GDP growth to come in at 4.5%, versus 2.2% a quarter prior.  Personally, I believe this forecast may be slightly too optimistic, and expect the number to be closer to 4%.  Slower inventory liquidations combined with a jump in consumption should prove to be the quarter’s biggest growth engines.   While on the surface the number will look positive, questions will be asked about the sustainability of this growth.  A portion of this growth is still being supported through accommodative fiscal and monetary stimulus, which will eventually begin to wane.  For more on this please see my piece ‘Looking at 2010’s Outlook and Risks’.  I expect GDP growth to peak in either 4Q09 or 1Q10 then gradually diminish throughout the remainder of the year, albeit remaining positive.  In terms of the Fed, relatively tepid growth in a post recession period combined with ultra-high unemployment and subdued inflation should convince the fed to remain on hold through most of 2010.  After the release, don’t be surprised to see a barrage of experts analyzing the details for clues over the sustainability of this growth—you know where I stand.

8:30 a.m. EST: 4Q09 Employment Cost Index (Risk: Neutral, Market Reaction: Marginal): Mostly stagnant salaries and wages, offset by some potential increases in benefit payments, should lead to only a modest increment in fourth quarter employment costs.  In the third quarter the index rose 0.4% indicating that wage pressure remains relatively benign.

*9:45 a.m. EST: Chicago PMI (Risk: Neutral, Market Reaction: Moderate): The Chicago PMI measures business activity in the mid-West, and is released one business day prior to the ISM. *I should note that the Chicago PMI is released several minutes early to subscribers, so the market could begin reacting to the data as early as 9:42 a.m.  The Chicago PMI is considered a forward looking indicator to the national ISM, so any large unexpected shifts in the Chicago PMI could impact trading.  The current Bloomberg consensus forecast is for a reading of 57.0, versus to 60.0 in December.  The PMI covers both the manufacturing and non-manufacturing sectors.

9:55 a.m. EST: January’s Final Consumer Sentiment (Risk: Neutral, Market Reaction: Moderate): January’s final consumer sentiment release will likely be mostly unchanged from the preliminary reading of 72.8.  The index has been trending up, but concerns over the job market and other adverse factors are limiting the upside.  The current Bloomberg consensus forecast is for a final reading of 73.0.

3:00 p.m. EST: January’s Farm Prices (Risk: Neutral, Market Reaction: Marginal): Given the relationship between farms prices and food prices, this index could have significant implications on future headline CPI.

Enjoy the weekend!

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