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Existing Home Sales Moving Back To Pre-Tax Credit Levels?

February 27th, 2010 Michael McDonough 1 comment

The chart below illustrates how existing home sales appear to be pulling back to levels that would have been expected without a surge in demand stemming from the first time home buyer tax credit, despite the programs extension/expansion.  This could be an indication that housing demand was mostly sopped up by the original tax credit, leaving few buyers in the market to take advantage of the new program.  The sector could face additional strife over the months ahead as mortgage rates are generally expected to rise once the Fed stops purchasing MBS at the end of March.  Whether or not the government’s new tax credit will drive a new set of buyers into the market is yet to be seen, but January’s pending home sales (Thursday 10:00AM EST) could provide some clues toward the strength or weakness in home sales over the next couple months.

Existing Home Sales

Source: Bloomberg

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US Economics Week Ahead: 2010 Starts with a Bang

December 31st, 2009 Michael McDonough Comments off

It is a good thing investors will have the entire weekend to recover from their New Year’s celebrations, because 2010 is starting with a bang, at least in terms of economic data.  Undoubtedly, the week’s most critical release will be Friday’s employment report, where excitement is building that payrolls could show their first monthly advance since gaining 120K jobs in December 2007. What a difference a year makes, considering it was announced last year that payrolls fell -524K December.  Leading up to this release data-centric investors will analyzing both the ISM manufacturing and non-manufacturing’s employment indices along with the ADP employment report for clues toward Friday’s release.

Other significant indicators this week include manufacturing ISM on Monday, pending home sales on Tuesday, non-manufacturing ISM and FOMC minute on Wednesday, and jobless claims and chain store sales on Thursday.  The manufacturing ISM should remain above 50 for the fifth consecutive month; however, weakness in some of the Fed’s regional manufacturing survey could place some negative pressure on the index leading to only a marginal gain from November’s release.  The FOMC minutes should prove to be a non-market moving event simply providing further details behind the Fed’s eventual exit strategy and the termination of its unprecedented accommodative policies.  Pending home sales should help provide some insight behind the health of home sales after the would-be expiration of the first time home buyer tax credit on November 30th.  Finally, chain store sales on Thursday will provide one of the first detailed looks at the holiday shopping season.

Fed speakers will be relatively active next week with Chairman Bernanke, Vice Chairman Kohn, and Atlanta Fed President Lockhart opening the week up on Sunday participating in a panel discussion for the American Economic Association in Atlanta.  On the earnings front, Bed Bath & Beyond (BBBY), Constellation Brands (STZ), Family Dollar Stores (FDO), and Monsanto (MON) are all expected to report this week.  Also, look for headlines from the 2010 Consumer Electronics Show that starts next week and could attract over 100K visitors.

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

Monday, Jan. 4

10:00 a.m. EST: December’s ISM Manufacturing Index (Risk: Neutral, Market Reaction: Significant): The Manufacturing ISM Index should remain above 50 for the fifth consecutive month, but experience only a marginal gain from November’s reading of 53.6.  Weakness in some of the Fed’s regional surveys could place downward pressure on this month’s release; however, some of this pressure should be alleviated by the fact that in November the ISM New Orders index came in at a relatively robust 60.3.  It will be important to continue monitoring the ISM’s new orders, employment, and prices paid index for implications toward the future and other sectors of the economy.  The current Bloomberg consensus forecast is for an ISM reading in December of 54.8, compared to 53.6 in November.

10:00 a.m. EST: November’s Construction Spending (Risk: Neutral, Market Reaction: Moderate): Construction spending will likely remain weak in November, and downward revisions to past data are likely to continue.  Construction spending was unchanged in October, but after revisions declined by -1.6% in September.  The current Bloomberg consensus forecast is for a decline in construction spending of -0.5%.

10:15 a.m. EST: Dennis Lockhart, the Atlanta Federal Reserve Bank President, will give a speech on government crisis response to the American Economic Association.

Tuesday, Jan. 5

December’s Motor Vehicle Sales (Risk: Neutral, Market Reaction: Moderate): Attractive dealer year-end incentives during December will likely help boost motor vehicle sales during the month.  The current Bloomberg consensus forecast for domestic vehicle sales is an annual pace of 8.4 million units, compared to 8.2 million a month prior.

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.  Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.  Last week’s number rose +0.4% compared to an increment of +0.6% 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 1.9% last week on a yearly basis.

10:00 a.m. EST: November’s Factory Orders (Risk: Neutral, Market Reaction: Marginal): After rising 0.6% in October, factory orders should continue to rise in November on the back of relatively strong durable goods orders and refinery orders stemming from higher energy prices.  The current Bloomberg consensus forecast is for a rise in factory orders of 0.4%.

10:00 a.m. EST: November’s Pending Home Sales (Risk: Downside, Market Reaction: Significant): This release should help quantify the impact of what would have been the expiration of the first time homebuyer tax credit on November 30th.  It is expected that a wave of buyers rushed to close their purchases before the end of the month to qualify for the first time home buyer tax credit.  Mortgage applications have recently been on the decline to supporting this theory.  It is expected that an extension/expansion of the program will eventually bring a new group of home purchasers into the market.

Wednesday, Jan. 6

7:00 a.m. EST: MBA Mortgage Applications (Risk: Neutral, Market Reaction: Marginal): The MBA was closed last week so this week’s release will include two weeks of data. 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 fell 10.7% two weeks ago after rising 0.3% a week prior.  Refinance applications fell 10.1%, while purchase applications dropped -11.6%.  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.

7:30 a.m. EST: December’s Challenger Job Cut Report (Risk: Neutral, Market Reaction: Marginal): This index measures the number of announced corporate mass layoffs, but does not take into account the timing of the actual layoffs.  Meaning layoffs announced in November may not actually take place until December, or even take place slowly over an extended period of time.  I anticipate this report will show continued improvements as companies have mostly completed large scale layoffs.

8:15 a.m. EST: December’s ADP Employment Report (Risk: Neutral, Market Reaction: Moderate): The ADP Employment report is considered a good window into Friday’s critical payroll number.  Any significant swings in this release combined with unexpected shifts in the manufacturing and non-manufacturing ISM employment indices could shift the consensus forecast for Friday’s employment release.

10:00 a.m. EST: December’s ISM Non-Manufacturing (Risk: Neutral, Market Reaction: Significant): After unexpectedly falling below 50 in November, investors will have the opportunity to decide whether this is the beginning of a new trend or a one off event.  Investors will also be paying close attention to the non-manufacturing ISM’s employment index, which could have some sway over the whisper number ahead of Friday’s employment report.  The current Bloomberg consensus forecast is for a reading of 50.4 compared to 48.7 a month prior.

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 a decline of -1.5 million barrels versus a drop of -4.9 million barrels a week prior.

2:00 p.m. EST: FOMC Minutes (Risk: Neutral, Market Reaction: Significant): The FOMC minutes should provide additional details behind the Fed’s eventual exit strategy and the termination of its unprecedented monetary easing.  However, I think it is still too early in the year to anticipate anything tremendously market moving from this report.

Thursday, Jan. 7

Chain Store Sales (Risk: Neutral, Market Reaction: Moderate): The market will be looking closely at this report as it is the first detailed report covering the holiday shopping season.  Early reports have indicated that the holiday shopping season may have been more robust than some had anticipated, but considering last year’s base this may not be as positive as it sounds.  Nevertheless, higher is better; I anticipate the strongest results will come from discount retailers as consumers grow increasingly budget conscious.

6:00 a.m. EST: Monster Employment Index (Risk: Neutral, Market Reaction: Marginal): Given the added significance of this week’s employment report this typically overlooked employment index could garner some extra attention. This survey conducted by Monster Worldwide Inc. measures online job demand.  According to the company, “The trend in online job availability has been largely flat for most of the year and remained so in November,” said Jesse Harriott, senior vice president and chief knowledge officer at Monster Worldwide. “While job losses have continued to ease, businesses remain cautious about adding to their payrolls in light of sustained economic uncertainty.”

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims fell 22K last week to 432K, after falling 28K a week prior.  It is important to note that the Christmas holiday, and the seasonal adjustment around it, could be skewing last week’s data.  The four week moving average improved to 460,250 from 465,250.  Improving initial jobless claims are indicative of fewer job losses in the BLS’s monthly employment report; however, the job situation will still get worse before it gets better.

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.

1:00 p.m. EST: Tom Hoenig, the Kansas City Federal Reserve Bank President, will give a speech on the economic outlook.

4:30 p.m. EST: Fed Balance Sheet & Money Supply—Current Week’s Release (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 shrank marginally last week to US$2.219trn from US$2.221trn, due to marginal reduction in the Fed’s agency MBS.    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. 8

8:30 a.m. EST: December’s Employment Situation (Risk: Neutral, Market Reaction: Very Significant): The current Bloomberg consensus is for a change in payrolls of 0, versus a decline of -11K in November.  Individual forecasts range from -50K to +40K.  A steady reduction in the number of initial unemployment claims bodes well for improving payroll data, but I think we could see an eventual reversal of seasonal hires as the holiday shopping season comes to a close in the months ahead.  I will be paying close attention to the index’s temporary employment index, which recently has been improving, and is a good forward looking indicator toward payrolls.  I continue to believe, despite a potentially positive reading in December, the employment situation will get worse before it stabilizes and begins to improve, albeit gradually, in 2Q10.  The current Bloomberg consensus forecast for the unemployment rate is 10.0%, unchanged from November.

10:00 a.m. EST: Wholesale Trade (Risk: Neutral, Market Reaction: Marginal): This indicator measure the level of inventories and sales by US wholesalers.  It is generally considered a good forward looking indicator toward trends in consumer behavior as stores typically ramp up inventories prior to any anticipated increment in sales.  It is important to note that this data is on a two month lag.

1:35 p.m. EST: Jeffrey Lacker, the Richmond Federal Reserve Bank President, will speak at the Maryland Bankers Association “First Friday” Economic Outlook Forum.

3:00 p.m. EST: November’s Consumer Credit (Risk: Neutral, Market Reaction: Moderate): I anticipate that little has changed in this sector, and we should continue to see a decline in consumer credit in the face of consumers less willing to borrow and banks less willing to lend.  November would be the tenth consecutive month consumer credit has declined.  In October consumer credit declined by -$3.5 billion, after declining by a revised -$8.9 billion in September.  The current Bloomberg consensus forecast is for a decline of consumer credit outstanding of -$5.0 billion for November.

Enjoy the weekend!

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US Economics Week Ahead: Jobs to the Rescue?

November 28th, 2009 Michael McDonough Comments off

This week investors face a barrage of data in addition to Chairman Bernanke’s Senate confirmation hearing.  On the economic front, Friday’s employment report should steal the show followed closely Tuesday’s manufacturing ISM release. Both the manufacturing and non-manufacturing ISM reports have indicated expansion over the past three months, and should again in November, albeit at a potentially slower pace due to some weakness in the Fed districts’ manufacturing surveys during the month.

Leading up to Friday’s employment report investors will be paying close attention to the ADP and both the ISM and Non-ISM employment indices, which have the potential to sway the current market consensus forecast of a -100K decline in payrolls. Other notable indicators this week include Monday’s Chicago PMI; Tuesday’s motor vehicle sales, construction spending, and pending home sales; Wednesday’s Beige Book; Thursday’s jobless claims and non-manufacturing ISM release; and finally Friday’s factory orders.

Other potential headline drivers this week include Fed talk from Charles Plosser and Jeffrey Lacker, the start of the Senate’s debate on healthcare, President Obama’s job’s forum, and Treasury Secretary Timothy Geithner’s testimony before the Senate Agriculture Committee Wednesday.

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

Monday, Nov. 30

*9:45 a.m. EST: November’s 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 react at 9:42 a.m. on the news.  This index 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 53.0, versus to 54.2 in October.  The PMI could experience some upward momentum stemming from a 15 point increase in the new orders index.  The PMI covers both the manufacturing and non-manufacturing sectors.

10:30 a.m. EST: November’s Texas Manufacturing Outlook (Risk: Neutral, Market Reaction: Moderate): This index is not highly publicized, and tracks manufacturing activity within the Dallas Feds jurisdiction.  Last month’s survey suggested, “Texas factory activity declined in October, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index—a key indicator of current manufacturing activity—edged further into negative territory, suggesting output in October contracted after remaining stable in September.”

3:00 p.m. EST: 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.

Tuesday, Dec. 1

November’s Motor Vehicle Sales (Risk: Neutral, Market Reaction: Moderate): Motor vehicle sales will likely edge down slightly in November, which is historically a weak month for auto sales.  Auto sales climbed 17.2% in October.  The current Bloomberg consensus forecast is for auto sales of 7.75 million compared to 7.90 million in October.  However, it should be noted that if this forecast is realized, then auto sales would finish positive for the first time on an annual basis since November 2007.

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.  Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.  Last week’s number indicated no change in store sales compared to a decline of -0.1% a week prior.

8:55 a.m. EST: Redbook (Risk: Negative, 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 were rose 2.8% last week on a year over year basis.

10:00 a.m. EST: November’s ISM Manufacturing Index (Risk: Neutral, Market Reaction: Significant): The ISM could face some downward pressure during the month after other manufacturing indices including the NY and Richmond Fed indices experienced declines in November.  It will also be important for investors to pay close attention to the forward looking new orders index, along with the employment index for clues towards Friday’s payroll release.  The current Bloomberg consensus forecast is for a reading of 55.0 versus 55.7, a month prior.  The forecast range is from 53.8 to 56.0.

10:00 a.m. EST: October’s Construction Spending (Risk: Neutral, Market Reaction: Marginal): Construction spending will likely decline modestly after rising 0.8% in September.  Construction spending was revised down in August from +0.8% to -0.1% after experiencing a surprise gain in September.  The current Bloomberg consensus forecast   is for a decline in spending of -0.4%.

10:00 a.m. EST: October’s Pending Home Sales (Risk: Neutral, Market Reaction: Moderate): Pending home sales have been on a tear providing plenty of momentum for existing and new home sales.  Pending home sales rose 6.1% in September, which was the index’s 8th consecutive month of gains for the index—the longest streak in the index’s history.

12:20 p.m. EST:  Charles Plosser, the Philadelphia Federal Reserve Bank President, will discuss the economic outlook.

Wednesday, Dec. 2

7:00 a.m. EST: MBA Mortgage Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.  Applications fell 4.5% last week after dropping 2.5%% a week prior.  Refinance applications dropped 9.5%, while purchase applications rose 9.6%.  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.

7:30 a.m. EST: Challenger Job Cut Report (Risk: Neutral, Market Reaction: Marginal): This index measures the number of announced corporate mass layoffs, but does not take into account the timing of the actual layoffs.  Meaning layoffs announced in November may not actually take place until December, or even take place slowly over an extended period of time.

8:15 a.m. EST: ADP Employment Report (Risk: Neutral, Market Reaction: Moderate): The ADP Employment report is considered a good window into Friday’s critical payroll number.  Any significant swings in this release combined with unexpected shifts in the manufacturing and non-manufacturing ISM employment indices could shift the consensus forecast for Friday’s employment release.

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 increment of 1.0 million barrels versus a decline of -0.9 million barrels a week prior.

2:00 p.m. EST: Beige Book (Risk: Neutral, Market Reaction: Moderate): Anecdotal evidence toward growth in the Fed’s Beige Book has slowly been turning more positive, which has recently been demonstrated through other economic indicators.  This report is typically released two weeks prior to FOMC meetings.

Thursday, Dec. 3

Ben Bernanke, Federal Reserve Chairman, is scheduled to appear for a confirmation hearing for the Senate Banking Committee.

President Obama will be holding a conference with leaders from the business, labor, finance and the nonprofit sectors.

Monster Employment Index (Risk: Neutral, Market Reaction: Marginal): This survey conducted by Monster Worldwide Inc. measures online job demand.  According to the company, “The rise in the October Index, along with an improvement in the annual rate, indicate a mild expansion in the underlying employer demand for workers” said Jesse Harriott, senior vice president and chief knowledge officer at Monster Worldwide. “While the decline in consumer confidence has likely contributed to reduced job demand in the retail and hospitality sectors, employers are actively recruiting in the healthcare and public sectors, resulting in stability of the overall Index.”

November’s Chain Store Sales (Risk: Neutral, Market Reaction: Moderate): US chain store sales should remain relatively flat to up modestly during the month on the back of mixed retail results.  Relatively strong performance in the ICSC-Goldman Sachs weekly chain store sales index should bode well for retailers, but numerous headwinds still exist, including a weak labor market and wavering consumer confidence reducing spending.

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims fell 35K last week to 466K, after showing no change a week prior. This is the lowest level reading since September 2008. But, a portion of this improvement was due to a strong seasonal adjustment factors due to annual deviations in the date of the Thanksgiving holiday—this could add some volatility to the index next week.  Nevertheless, claims continue to trend down and are indicative of fewer job losses in the monthly employment report, however, the job situation will still continue to get worse before it gets better.  The current Bloomberg consensus forecast is expecting claims to come in at 485K, an increase of 19K form last week.

8:30 a.m. EST: Final Third Quarter Productivity and Costs (Risk: Neutral, Market Reaction: Moderate): The recent revision of third quarter GDP to 2.8% from 3.5%, will likely lead to a minor downward revision to last quarter’s stellar productivity number.  The Bloomberg consensus forecast is expecting a revised quarterly increase in productivity of 8.6%, compared to the original release indicating a jump of 9.5%. But, strong gains in productivity could cause employers to delay hiring as they are now receiving more output from fewer workers.  The Bloomberg consensus forecast is also anticipating an upward revision to unit labor costs from -5.2% to -4.2%.

10:00 a.m. EST: November’s ISM Non-Manufacturing Index (Risk: Neutral, Market Reaction: Significant): The ISM non-manufacturing index should experience a modest rise during the month, realizing the third consecutive month of a reading over 50.  It will also be important to monitor the index’s employment component, which could impact Friday’s employment situation forecasts.  The current Bloomberg consensus forecast is for a reading of 52.0 compared to 50.6 in October. 

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 shrank last week to US$2.189trn from US$2.192trn, after ballooning two weeks prior.    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, Dec. 4

8:30 a.m. EST: November’s Employment Situation Report (Risk: Neutral, Market Reaction: Very Significant): Continued second derivative improvements in the labor market should help slow the decline in payrolls after last month’s -190K drop.  The current Bloomberg consensus forecast for November’s payrolls is a decline of -100K, with the unemployment rate unchanged at 10.2%.  It will be important to monitor this week’s ADP, ISM employment index, and non-ISM employment index for unexpected swings that could impact the consensus forecast.

10:00 a.m. EST:  Charles Plosser, the Philadelphia Federal Reserve Bank President, will give opening remarks at conference on Policy Lessons from the Economic and Financial Crisis in Philadelphia.

10:00 a.m. EST: September’s Factory Orders (Risk: Neutral, Market Reaction: Moderate): A weak advanced durable goods release could place some downward pressure on factory orders. The current Bloomberg consensus forecast is for a modest increment of 0.2%, compared to a rise of 0.9% in September.

1:15 p.m. EST:  James Bullard, the St. Louis Federal Reserve Bank President, will speak at the Philly Fed’s conference.

Enjoy the weekend!

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Morning Macro Recap: ISM & Pending Home Sales

November 2nd, 2009 Michael McDonough Comments off

The ISM manufacturing index rose in October to 55.7 from 52.6 in September, which was above expectations.  This was the highest reading for the index since April.  The prices paid index climbed to 65.0 in October from 63.5 a month prior. The employment index jumped to 53.1 during the month from 46.2 in September. The new orders index fell slightly to 58.5 in from 60.8.  The rise in the employment index was quite drastic and unexpected, and if confirmed by the non-manufacturing ISM and ADP employment report we could see some upward revisions to the consensus survey for Friday’s employment report.  Interestingly,there have only been three occasions where an ISM employment report above 50 coincided with a decline in payrolls, however, I feel pretty safe in saying this month will be the fourth occurrence.  Nevertheless, any job growth, especially if sustainable, would be a big positive for the US economy.

September’s pending home sales rose 6.1%, which is the 8th consecutive month of gains for the index.  The likely driver behind this jump is home buyers trying to sign contracts and close deals in time to take advantage of the first time home buyer tax credit.  On a year over year basis pending home sales are up 21.2%

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US Economics Week Ahead: Jobs & the Fed

October 31st, 2009 Michael McDonough Comments off

With the first week of November comes a wave of important economic data—plus a few key earnings announcements—important macro releases include October’s employment report, an FOMC announcement, and several other indicators that will help gauge the health of the consumer and overall economy.  Also important to note is that the ECB, Bank of England, and Bank of Australia are all scheduled to make their own policy announcements next week, which could have some carry over into US markets.  On the earnings front, the market will be hearing from companies that include Cisco, Kraft Foods, Viacom, and Prudential.

Nevertheless, this week’s spotlight will be on Friday’s employment report, which is expected to show the unemployment rate moving from 9.8% to 9.9% with a decline in payrolls of -175K.  During the week it will be important for investors to watch the employment components of both the manufacturing and non-manufacturing ISM along with the ADP employment report for any clues towards Friday’s payroll numbers.  Any major swings in these indicators could shift expectations for Friday’s number and thus have a big impact on the day’s trading.

This Wednesday’s FOMC statement will undoubtedly receive immense scrutiny from investors looking for hints toward the timing of an eventual tightening cycle, however, as economic conditions have remained fairly static since the last meeting major changes are unlikely.  Other notable indicators include Monday’s motor vehicle sales and manufacturing ISM, Wednesday’s non-manufacturing ISM and Treasury refunding announcement, Thursday’s chain store sales and productivity, and Friday’s consumer credit report.

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

Monday, Nov. 2

October’s Motor Vehicle Sales (Risk: Neutral, Market Reaction: Moderate): Car companies once again introduced strong incentives for the month to bring buyers back into the market after the expiration of the government’s ‘Cash for Clunkers’ program, but sales should remain relatively subdued.  The current Bloomberg consensus forecast is for domestic vehicle sales at an annualized pace of 7.3 million units compared to 6.7 million units in September.  August sales reached an annualized pace of 10 million units thanks to the ‘Cash for Clunkers’ program.

10:00 a.m. EST:  ISM Manufacturing Index (Risk: Neutral, Market Reaction: Significant): October’s ISM index should remain above 50 for the third consecutive month, despite likely remaining relatively unchanged from September’s release of 52.6.  The current Bloomberg consensus forecast is for a release of 53.0.  Investors will not only be paying close attention to the new orders index—previously 60.8—, but also the employment index—previously 46.2— for clues toward Friday’s employment report.  An ISM above 50 bodes well for the overall economy, and should place some upward momentum on industrial production.

10:00 a.m. EST:  September Construction Spending (Risk: Neutral, Market Reaction: Marginal): According to the Bloomberg consensus survey construction spending is expected to fall -0.2% in September versus an increment of 0.8%in August.  Strong housing start data will likely place some momentum on residential construction while high commercial vacancy rates and lower government spending should more than offset these gains through government and public construction spending.

10:00 a.m. EST:  September’s Pending Home Sales (Risk: Neutral, Market Reaction: Moderate): Pending home sales rose 6.4% in August.  However, pending home sales could start facing some pressure over the coming months as the first time home buyer tax credit is presently set to expire on November 30th.

10:30 a.m. EST:  Daniel Tarullo, Federal Reserve Governor, is participating on a panel to discuss executive compensation at a University of Maryland event.

10:00 p.m. EST:  US Treasury 4Q09 Borrowing Requirements (Risk: Neutral, Market Reaction: Marginal): The Treasury will release its borrowing estimates for the next two quarters.  Further details will be released in Wednesday’s refunding announcement.

Tuesday, Nov. 3

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.  Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.  Last week’s number indicated a weekly increment of 0.1% in store sales compared to a gain of 0.2% a week prior.

8:55 a.m. EST: Redbook (Risk: Negative, 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 were rose 0.7% last week on a year over year basis.

10:00 a.m. EST:  Factory Orders (Risk: Neutral, Market Reaction: Marginal): After falling -0.8% in August—on the back of weak durable goods—factory orders are expected to show at least a modest gain.  The current Bloomberg consensus forecast is for an increment in September of 1.0%.  The advanced durable goods orders report indicated a 1.0% increment in September, which should place some upward momentum on September’s factory orders.

Wednesday, Nov. 4

7:00 a.m. EST: MBA Purchase Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.  Last week’s data declined 12.3% after falling 13.7% a week prior possibly due to the upcoming expiration of the first time home buyer tax credit.  The refinance index fell 16.2%, while the purchase index fell 5.2%.

7:30 a.m. EST:  Challenger Job-Cut Report (Risk: Neutral, Market Reaction: Marginal): This index measures the number of announced corporate mass layoffs, but does not take into account the timing of the actual layoffs.  Meaning layoffs announced in October may not actually take place until September, or even take place slowly over an extended period of time.

8:15 a.m. EST:  ADP Employment Report (Risk: Neutral, Market Reaction: Moderate): The ADP Employment report is considered a good window into Friday’s critical payroll number.  Any significant swings in this release combined with unexpected shifts in the manufacturing and non-manufacturing ISM employment indices could shift the consensus forecast for Friday’s employment release.

9:00 a.m. EST:  Treasury Refunding Announcement (Risk: Neutral, Market Reaction: Moderate): According to the Securities Industry and Financial Markets Association the Treasury will likely announce that it will issue $444.5 billion of marketable debt during the fourth quarter.  This would equate to a 13% jump from last quarter, but remain below the levels of fourth quarter 2008 as they were beginning to fund several new programs.  Treasury yields have the potential to creep higher over the coming months as additional supply hits the market.

10:00 a.m. EST:  October’s ISM Non-Manufacturing Index (Risk: Neutral, Market Reaction: Significant): Like the manufacturing ISM, non-manufacturing ISM, should remain above 50, but be relatively unchanged on a month over month basis.  The current Bloomberg consensus forecast is for a reading of 51.9, versus 50.9 in September.  Again, investors will be paying close attention to the employment index for clues towards Friday’s employment report.  Also, it is important to look for any continued improvements in the new orders index that would confirm a continued upward trend for the index.

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 a rise of 0.8 million barrels versus an increment of 1.3 million barrels a week prior.

2:15 p.m. EST:  FOMC Announcement (Risk: Neutral, Market Reaction: Significant): Investors will be analyzing the FOMC statement very closely for any indication of when they intend to begin tightening monetary policy or how they intend to withdraw quantitative easing.  Nevertheless, it is unlikely that November’s statement will express any significant changes versus the prior month, as economic conditions have remained somewhat static.  However, you can be sure the statement will be analyzed under a microscope for even the slightest hint of a shift in policy.

Thursday, Nov. 5

October Chain Store Sales (Risk: Neutral, Market Reaction: Moderate): US chain store sales were up 0.1% on a yearly basis in September, and could experience some modest gains in October.  Relatively strong performance in the ICSC-Goldman Sachs weekly chain store sales index should bode well for retailers, but numerous headwinds still exist, including a weak labor market and wavering consumer confidence reducing spending.  

October’s Monster Employment Index (Risk: Neutral, Market Reaction: Marginal): This survey conducted by Monster Worldwide Inc. measures online job demand.  According to last month’s national survey, “Despite recent improvements in economic sentiment, U.S. employers continue to exhibit caution when it comes to hiring,” said Jesse Harriott, senior vice president and chief knowledge officer at Monster Worldwide.“On the upside, demand for workers is firming in the blue-collar segment, with welcome signs of revived activity in construction and manufacturing.”

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims fell last week by 1K to 530K, after falling 11K a week prior. Despite second derivative improvements these numbers still indicate further deterioration to upcoming payroll numbers, and the unemployment rate, which is very likely to exceed 10% in the coming months. The current Bloomberg consensus forecast is expecting a pullback in this week’s initial claims data to 523K from 530K—these numbers are still very high.

8:30 a.m. EST: Third Quarter 2009 Productivity and Costs (Risk: Neutral, Market Reaction: Significant): Productivity gains continue to surprise to the upside as employers are able to gain more output from fewer employees.  Never before in history has productivity experienced such strong gains during a protracted economic downturn.  With that said the current Bloomberg consensus forecast is for third quarter productivity growth of 6.3%, compared to 6.6% during the second quarter.  A 6.3% rise in 3Q09 nonfarm business gross value add coupled with a what is a forecasted decline in nonfarm private sector hours worked helps support the case for strong productivity growth during the quarter.  Strong gains in productivity will likely cause employers to delay employers from hiring as they are now receiving more from less.

9:00 a.m. EST: RBC CASH index (Risk: Neutral, Market Reaction: Significant): The Royal Bank of Canada’s Consumer Attitudes and Spending by Household (CASH) Index is a monthly measure of consumer attitudes toward investing, the economic outlook, and personal finances.  This index does hold some importance in so much that it tends to demonstrate a pretty significant correlation with the consumer sentiment index being released next week.

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 again declined last week to US$2.144trn from US$2.183trn a week prior.    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, Nov. 6

8:30 a.m. EST: Employment Situation Report (Risk: Neutral, Market Reaction: Very Significant): The current Bloomberg consensus forecast is for a decline in payrolls of -175, versus a decline of -263K in September, and an unemployment rate of 9.9% compared to 9.8% a month earlier.  October’s anticipated second derivative improvement in payrolls is partially due to expected improvements in September’s education components after strong losses last month. The unemployment rate will likely continue to rise—the consensus forecast range for October’s unemployment rate is 9.9% to 10.1%—and eventually peak above 10% next year.

10:00 a.m. EST: Wholesale Trade (Risk: Neutral, Market Reaction: Marginal): This indicator measure the level of inventories and sales by US wholesalers.  It is generally considered a good forward looking indicator toward trends in consumer behavior as stores typically ramp up inventories prior to any anticipated increment in sales.  It is important to note that this data is on a two month lag.

3:00 p.m. EST: September’s Consumer Credit Outstanding (Risk: Neutral, Market Reaction: Moderate): After falling $12.0 billion in August consumer credit outstanding likely declined again during September with declines in both revolving and non-revolving credit.  The current Bloomberg consensus forecast is for a decline of US$10.0 billion.  This would be the eighth consecutive month of declines for consumer credit outstanding.  It is important to note that the monthly changes in this index have been quite volatile recently making it harder to calculate accurate forecast. 

3:00 p.m. EST:  Elizabeth Duke, Federal Reserve Governor, delivers the keynote address at the Chicago Fed’s annual Community Bankers Symposium.

Enjoy the weekend!

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US Economics Week Ahead: Markets Try to Find Traction in an Array of Data

September 25th, 2009 Michael McDonough 1 comment

There’s no doubt this week’s most important release will be Friday’s employment report, which is expected to show a decline in payrolls of -170K with an unemployment rate of 9.8%.  This week could prove critical as markets try to regain some traction after several negative surprises last week, including lower than anticipated existing home sales and durable goods orders.  However, looking at the docket this week (and possibly the months ahead) may hold slightly more downside risk than upside as the effects of the Cash for Clunkers program continues to fade, and the first time home buyer credit ticks closer to expiration come the end of November.  Other heavy hitters to watch this week include Tuesday’s consumer confidence report, Wednesday’s Chicago PMI release, and jobless claims, ISM, and personal income and outlays on Thursday.

Ending on a more positive note, the US is expected to return to positive GDP growth starting in 3Q09 on the back of improvements in the inventory cycle stemming from a slower rate of destocking.  However, the magnitude and longevity of this return to growth will be strongly dependent on consumer demand returning to the market.

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

Monday September 28th:

8:30AM: Chicago Fed National Activity Index for July (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 shown improvements over the preceding six months and is expected to improve again in August from its reading of -1.7 in July.

10:30AM: Dallas Fed, Texas Manufacturing Outlook (Risk: Neutral, Market Reaction: Marginal): This index is not highly publicized, and tracks manufacturing activity within the Dallas Feds jurisdiction.  Last month’s survey suggested “that factory activity continued to contract at a slower pace in August.”

Tuesday September 29th:

7:45AM: ICSC-Goldman Store Sales (Risk: Negative, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales.  Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.  Last week’s number indicated a weekly decline of -2.0% in store sales compared to an increase of +0.0% a week prior.

8:55AM: Redbook (Risk: Negative, 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 were down -2.6% last week on a year over year basis.

9:00AM: S&P Case-Shiller Home Price Index (Risk: Neutral, Market Reaction: Moderate): The Case Shiller HPI has shown some signs of life rising 1.4% in June with only Las Vegas and Detroit experiencing monthly declines.  But, on a year over year basis both the Case-Shiller 10 and 20 city composite indices are still down over 15%.  Nevertheless, the index will likely show a modest monthly improvement in July on the back of relatively strong housing activity.

9:50AM: Richard Fisher, Dallas Federal Reserve Bank President, gives a speech on the state of the economy.

10:00AM: Consumer Confidence (Risk: Negative, Market Reaction: Significant): Recent advances in other consumer confidence indicators, including Reuters/UMich Consumer Sentiment Index, should help add some upward momentum to the Conference Board’s September Consumer Confidence number.   A weak labor market is still a big concern for consumers, however, indications that the economy may be improving will likely not go unnoticed.  The current Bloomberg consensus forecast is for an increase to 57.0 from August’s number of 54.1.

10:00AM: 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, “[August’s] increase represents the eighth consecutive improvement in Global Investor Confidence, and places the risk appetite of institutional investors firmly in the range that is associated with accumulation of risk exposures,” They went on to say. “At the same time, the rate of increase in the Index has moderated relative to some months ago, suggesting that institutions are being somewhat selective in their allocations.”

3:00PM: 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.

7:00PM: Charles Plosser, Philadelphia Federal Reserve Bank President, is speaking on Fed’s role in the economy at the Lehigh Valley Economic Outlook

Wednesday September 30th:

7:00AM: MBA Purchase Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.  Last week’s data showed an increment of 12.8% on higher refinancing activity stemming from mortgages rates slipping below 5%.  The refinance index rose 17.4%, while the purchase index rising 5.6%.Refinances made up 63.8% of all applications last week.

8:15AM: ADP Employment Report (Risk: Neutral, Market Reaction: Moderate): The ADP Employment report is considered a good window into Friday’s critical payroll number.  Last month, however, the ADP reported indicated job losses of -298K, while payrolls declined by only -216K.

8:30AM: GDP (Risk: Neutral, Market Reaction: Moderate): According to the Bloomberg consensus survey, the BEA’s final estimate of 2Q09 GDP is likely to come in at -1.2%, compared to the preliminary estimate of -1.0%.  The culprits behind the anticipated slippage are faster inventory liquidation and weaker net exports. GDP is widely expected to turn positive in 3Q09.

9:45AM: Chicago PMI (Risk: Negative, Market Reaction: Moderate): This Chicago PMI measures business activity in the mid-West, and is released one day prior to the national ISM index.  Adverse effects from strong seasonal adjustment factors could cause this index to surprise on the downside.  The current Bloomberg consensus forecast is for an increase to 52.0 in September versus 50.0 in August.  It will be important to pay close attention to any significant changes to the new orders, employment, and prices paid indices. The new orders index broke above 50 in August for the first time in 11 months.

10:30AM: 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 a rise of 2.8mn barrels versus a decline of -4.7mn barrels a week prior.

Thursday October 1st:

Motor Vehicle Sales (Risk: Negative, Market Reaction: Moderate): Auto sales will likely face a sharp pullback in September, no longer benefitting from the US government’s Cash for Clunkers program.  The current Bloomberg consensus is forecasting 8.0mn domestic sales for September, versus a 10.1mn annual pace in August.  Despite the precipitous drop, the y/y decline should be less now than it was prior to the Cash for Clunkers program, which is somewhat positive.

Monster Employment Index (Risk: Neutral, Market Reaction: Marginal): This survey conducted by Monster Worldwide Inc. measures online job demand.

7:30AM: Challenger Job-Cut Report (Risk: Neutral, Market Reaction: Moderate): This index measures the number of announced corporate mass layoffs, but does not take into account the timing of the actual layoffs.  Meaning layoffs could be announced in September, but not take place until October, or may even take place slowly over an extended period of time.

8:30AM: Personal Income & Outlays (Risk: Neutral, Market Reaction: Significant): The temporaneous effects of the Cash for Clunkers program have likely lead to a significant increment in consumer spending for August, with the Bloomberg consensus forecast anticipating a 1.1% monthly increase, higher energy prices may have also had a marginal impact.  Personal income will likely turn slightly positive for the month on the back of higher average wages; the current Bloomberg consensus forecast is for a monthly increment of 0.1% versus no change last month.  The core PCE is expected to rise 0.1%.

8:30AM: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims fell last week by 21K to 530K. Initial claims should continue to demonstrate marginal improvements over the coming months as weakness in the labor market slowly abates. But, make no mistake about it these levels are still uncomfortably high, and will continue to adversely impact the US payroll data for some time.  In fact using a simple regression analysis claims at their current levels would indicate a decline in payrolls of roughly 480K, however, recently this model has been exaggerating the actual effect on payrolls, but nevertheless is a cause for concern going forward.  The current Bloomberg consensus for this week’s initial claims release is 537K. The anticipated increment for claims may still be due to seasonal adjustment effects stemming from the later than usual Labor Day Holiday.

10:00AM: ISM Manufacturing Index (Risk: Neutral, Market Reaction: Significant): In August the ISM rose for the 8th consecutive month finishing August at 52.9, this was the index’s first reading above the breakeven point of 50 since January 2008.  Looking to September, the current Bloomberg consensus forecast is for a reading of 53.5, which I personally believe may be slightly optimistic.  Nevertheless, the new orders index did jump last month to 64.9 from 55.3.  With that in mind it will be very important to pay close attention to September’s new orders and employment index, which could help set the tone for the overall report.

10:00AM: Construction Spending (Risk: Negative, Market Reaction: Moderate): According to the Bloomberg consensus survey construction spending is expected to fall -0.1% in August versus a decline of -0.2% in July.  Non-residential construction should continue placing the strongest downward pressure on the overall index, while residential construction spending also has the potential to move into negative territory after gaining 2.3% in July and 0.4% in June on a strengthening housing market.

10:00AM: Pending Home Sales (Risk: Neutral, Market Reaction: Moderate): Pending home sales rose 3.2% in June, realizing its sixth consecutive monthly gain.  However, pending home sales could start facing some pressure over the coming months as the first time home buyer tax credit is presently set to expire on November 30th.

10:30AM: 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.

4:30PM: 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 again last week to US$2.141trn from US$2.125trn a week prior.  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.

5:30PM: Sandra Pianalto, Cleveland Federal Reserve Bank President, is speaking at a Market News international seminar in NY.

Friday October 2nd:

8:30AM: Employment Situation Report (Risk: Neutral, Market Reaction: Very Significant): The current Bloomberg consensus forecast is for a decline in payrolls of -170K for September, compared to a decline of -216K in August.  However, it is important to keep in mind that a later than usual Labor Day could lead to some discrepancies in this month’s data.  Nevertheless, we should see an improvement from last month’s declines.  According to the Bloomberg consensus forecast the unemployment rate is expected to rise to 9.8% from 9.7%.

10:00AM: Factory Orders (Risk: Negative, Market Reaction: Moderate): The current Bloomberg consensus forecast is for an increment in factory orders of 1.0% in August, versus +1.3% in July.  However, unexpected weakness in last week’s durable goods release on Friday may cause some revisions to this number.

Enjoy the weekend!

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ISM Up, Construction Spending Neutral, & Pending Home Sales Rise

September 1st, 2009 Michael McDonough Comments off

The ISM rose for the 8th consecutive month finishing August at 52.9, this was the index’s first reading above the break even point of 50 since January 2008. Improvements in manufacturing will likely have positive implications for 3Q09 Real GDP growth. The new orders index increased to 64.9 from 55.3 a month prior. This index indicates that increments in the ISM should continue. The prices paid index rose to 65.0 from 55.0 a month prior. Despite the increment in the ISM the employment index remains below 50, moving to 46.4 from 45.6 a month prior.  Norbert J. Ore, CPSM, C.P.M., chair of the ISM said in the report, “The year-and-a-half decline in manufacturing output has come to an end, as 11 of 18 manufacturing industries are reporting growth when comparing August to July. While this is certainly a positive occurrence, we have to keep in mind that it is the beginning of a new cycle and that all industries are not yet participating in the growth. The August index of 52.9 percent is the highest since June 2007. The 4 percentage point increase was driven by significant strength in the New Orders Index, which is up 9.6 points to 64.9 percent, the highest since December 2004. The growth appears sustainable in the short term, as inventories have been reduced for 40 consecutive months and supply chains will have to re-stock to meet this new demand.”

Construction spending fell by 0.2% in August. An increment in residential; construction spending was offset by a declines in non-residential and public spending.

Pending home sales rose 3.2% in June, realizing the index’s sixth consecutive monthly gain. This is continued evidence the housing sector has bottomed, and is in the midst of a gradual recovery. But, rising foreclosures and delinquencies on all types of mortgages stemming from weakness in the labor market will prevent any recovery in housing from reaching its full potential.  Lawrence Yun, NAR chief economist, said, “The recovery is broad-based across many parts of the country. Housing affordability has been at record highs this year with the added stimulus of a first-time buyer tax credit.”

Ford will be the first auto company reporting sales later today at 12:00PM, be sure to keep an eye out for this data.

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US Week Ahead: The Start of September…

August 29th, 2009 Michael McDonough Comments off

This week brings the onset of a notoriously bad month for returns, and given the week’s vast array of critical data, the ball is sure to start rolling in one direction or another.  First let me apologize if this week’s calendar seems somewhat abridged, as I am on vacation, and am writing it amid the sounds of seagulls and breaking waves.  This week’s key releases are the ISM manufacturing report, which has the chance to move above the breakeven point of 50 for the first time in roughly 20 months, and August’s employment report, which is likely to show continued deterioration.  Other notable reports include motor vehicle sales  on Tuesday, which will help us better comprehend the full magnitude of the government’s ‘Cash for Clunkers’ program, the ISM non-manufacturing report, and the release of the FOMC minutes, which will help investor’s gain a finer understanding of the Fed’s bias.  It is a busy week, so I recommend paying close attention.

Monday August 31st:

9:45AM: Chicago PMI (Risk: Neutral, Market Reaction: Moderate): This Chicago PMI measures business activity in the mid-West, and is released one day prior to the national ISM index.  In July most of the index’ components experienced gains, supporting a recovery in the US.  The current Bloomberg consensus forecast for August’s release is 48.0, compared to a previous reading of 43.4.  It will be important to pay close attention to any significant changes to the new orders, employment, and prices paid indices, all of which are currently below the breakeven of 50.  Last month the PMI stated, “If this were an average recession, it would end four months after the low point in the Barometer, suggesting an end of the recession in August 2009. A more conservative rule would draw an analogy to the 1981-82 recession, since this is not working out to be an average recession. Using that rule, the end of this recession would be projected to be 9 months after the lowest value of the Chicago Business Barometer. With March as our best current estimate of that minimum, the recession is projected to end in December 2009.”

3:00PM: 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.

Tuesday September 1st:

Motor Vehicle Sales (Risk: Upside, Market Reaction: Moderate): Motor vehicle sales will likely be up significantly on the back of the government’s ‘Cash for Clunker’ program.  The current Bloomberg consensus forecast is for sales is10.5mn, compared to the previous month’s sales of 8.3mn.

7:45AM: ICSC-Goldman Store Sales (Risk: Downward, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales.  Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.  Last week’s number indicated a rise of 0.6% in store sales compared to a decline of -0.9% a week prior.

10:00AM: ISM Manufacturing Index (Risk: Upside, Market Reaction: Significant): The ISM has experienced seven straight months of gains, and given this trend and improvement in other manufacturing indicators has the potential to move above the breakeven point of 50 this month.  This belief is strengthened by strong performance of the ISM’s new order index last month, which came in at 55.3. The current Bloombeg consensus forecast is for a reading of 50.5, compared to July’s reading of 48.9.

10:00AM: Construction Spending (Risk: Neutral, Market Reaction: Moderate): Increased activity in the residential and government sectors will likely be offset by diminishing spending on the commercial structures, leading the no significant changes in construction spending.  The current Bloomberg consensus is for a 0.0% change from last month, compared to an increment of 0.3% a month prior.

10:00AM: Pending Home Sales (Risk: Upside, Market Reaction: Moderate): Large increments in new mortgage applications and general improvements in the housing sector will likely sustain upward momentum in pending home sales.  Pending home sales were up 3.6% a month prior.  Pending home sales tends to be a reasonable forward looking indicator to final home sales, however, not all pending sales become final.

Wednesday September 2nd:

7:00AM: MBA Purchase Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.  Last week the overall index increased for the fourth consecutive week with a gain of 7.5%; while the refinance index rose 12.7% and the purchase index rose 1.0% on the back of relatively low mortgage rates and declining home prices.

7:30AM: Challenger Job Report (Risk: Neutral, Market Reaction: Marginal): This index measures the number of announced corporate mass layoffs.  But, this data does not take into account the timing of the actual layoffs.

8:15AM: ADP Employment Report (Risk: Neutral, Market Reaction: Significant): The ADP Employment report is considered a reasonable window into Friday’s critical payroll number.  Last month, however, the ADP reported indicated job losses of -371K, while payrolls declined by only -247K.

8:30AM: Productivity & Costs (Risk: Neutral, Market Reaction: Marginal): This will be the final release of 2Q productivity and labor costs.  It is unlikely there will be significant changes from the preliminary numbers, which showed a significant 6.4% increase in productivity and a -5.8% decline for unit labor costs.  In fact the current Bloomberg consensus forecast calls for no changes in either indicator.

10:00AM: Factory Orders (Risk: Upside, Market Reaction: Marginal): Increased durable goods orders largely on the back of the US government’s ‘Cash for Clunkers’ program will likely supply positive momentum for factory orders.  The current Bloomberg consensus forecast is for an increment of 2.3%, compared to 0.4% a month prior.

10:30AM: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report indicates domestic petroleum inventories, which could have a significant impact on the energy sector.  Last week this report showed an increase in inventories of 0.2mn barrels after declining -8.4mn a week prior.

2:00PM: FOMC Minutes (Risk: Neutral, Market Reaction: Marginal): Given the three week lag between the FOMC meeting and the release of the minutes this should have only a marginal effect on trading. But, the minutes could elaborate the rationale behind the FOMC’s decision, and give some clues to future decisions, in which case the market could move on the release.

Thursday September 3rd:

Chain Store Sales (Risk: Downside, Market Reaction: Moderate): Chain store sales probably came under pressure again last month, as consumers reduced spending on the back of weakness in the labor market.  In fact, a recent survey by the National Retail Federation found that families this year will be spending on average US$549 versus US$594 last year on back to school goods.  This along with other negative factors should adversely impact this summer’s retail sales.

Monster Employment Index (Risk: Neutral, Market Reaction: Marginal): This survey conducted by Monster Worldwide Inc. measures online job demand.

8:30AM: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims fell last week by 10K to 570K. Claims should marginally improve over the coming months as weakness in the labor market slowly abates. But, make no mistake about it these levels are still uncomfortably high, and will continue to adversely impact the US payroll data for some time.  The current Bloomberg consensus for this week’s initial claims number is 562K.  In fact using a simple regression analysis claims at their current levels would indicate a decline in payrolls of roughly 500K, however, recently this model has been exaggerating the actual effect on payrolls, but nevertheless is a cause for concern going forward.

10:00AM: ISM Non-Manufacturing Index (Risk: Upside, Market Reaction: Moderate): August’s non-manufacturing ISM should show continued improvement, but remain below the breakeven mark of 50.  In July the new orders component came in below 50 at 48.1, and is not expected to break above 50 this month either.

10:00AM: 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.

4:30PM: 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.  Last week the Fed’s balance sheet rose to US$2.049trn from US$2.037trn a week prior.  The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt, and mortgage-backed securities to helping to control interest rates.

Friday September 4th:

8:30AM: Employment Report (Risk: Downside, Market Reaction: Very Significant): Elevated levels of initial jobless claims will likely place continued pressure on payrolls.  The current Bloomberg consensus forecast is for a decline in payrolls of -200K, and an unemployment rate of 9.6%.  I believe the consensus forecast for payrolls may be somewhat optimistic, and will be looking for additional hits in this week’s ADP and ISM employment indices.

Enjoy the weekend!

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Pending Home Sales Surprises to the Upside

August 4th, 2009 Michael McDonough Comments off

An upward surprise in this morning’s pending home sales data  helped to restore some sentiment to the market after a disappointing personal income release.  Pending home sales were up 3.6% in June, compared to a consensus forecast of 0.7%.  This was the 5th consecutive month of gains.  Pending home sales were up in all four regions with the south leading the way with a rise of 7.1% (see chart).  I mentioned this index may have some positive risk in this week’s US Week Ahead.  Low home prices, tax incentives, and attractive mortgage rates continue to draw buyers back into the market.  This number continues to support what appears to be a stabilization in the US housing market.  But, continued weakness in the labor market coupled with high levels of foreclosures will prevent housing from realizing its full potential for the foreseeable future.

Pending Home Sales

Pending Home

Source: NAR

The US$8,000 first time home buyer program is set to expire on December 1st 2009.  It will be interesting to monitor the effects this may have on the current housing market, if not extended.  Potentially, we could see a rush of purchases over the next several months as individuals try to take advantage of the discount.  I imagine this incentive has had the biggest impact in areas with relatively low home values, given income stipulations, and the fact that saving 8K on a 100K home looks much more attractive then saving 8K on a 500K purchase.  This could partially explain the large gains seen this month in the South.  There are also numerous other state incentives designed to stimulate home sales, which are likely adding to sales.

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