Fiat Economics

Retailers are not dreaming of a white Christmas.  Whether a snowstorm impacting the Mid-Atlantic region this weekend will impact an arguably lackluster holiday shopping season is yet to be seen.  But, bad weather does have a tendency of keeping would be shoppers home, however, these shoppers will still have access to online stores, but given the proximity to the holiday, would likely be forced to dish out expedited shipping charges.  Despite the shortened week the market will be receiving several early Christmas presents including November’s new and existing home sales data, durable goods orders, personal income and outlays, and finally December’s final consumer sentiment reading.  Given the holiday many market participants will likely be away from their desks, which could cause higher than usually volatility on the back of light buying.  Investors will also be paying close attention to Thursday’s jobless claims data after disappointing data last week.

On the earnings front we will be hearing from Micron (MU), Red Hat (RHT), Walgreen (WAG), and Conagra (CAG).  Investors will also want to look for headlines from Iraq where it has been reported that Iran took over an oil well in the south of the country.  If the situation escalates, geopolitical instability in the Middle East not only has the potential cause a spike in oil prices, but could draw investors away from risk.  On oil, OPEC is scheduled to meet next week, and will likely keep production unchanged.  Enjoy the holidays.

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

Monday, Dec. 21

8:30 a.m. EST: November’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 trending upwards over the preceding nine months, and should show some improvement in November from its reading of -1.08 in October.

Tuesday, Dec. 22

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 a drop of -1.3% a week prior.

8:30 a.m. EST: Third Quarter 2009 GDP (Risk: Neutral, Market Reaction: Moderate): I anticipate that very little will change from the BEA’s preliminary estimate of third quarter 2009 GDP at 2.8%.  The preliminary estimate was down markedly from the BEA’s advanced estimate of 3.5%.  The current Bloomberg consensus forecast is for a reading of 2.8%.  This release should be a non-event barring any unforeseen revisions.

8:30 a.m. EST: Third Quarter Revised Corporate Profits (Risk: Neutral, Market Reaction: Marginal): The importance of this release is somewhat muted given its timing toward the end of the 3Q09 earnings season.  However, since these profits tie into GDP growth, and do not always move lock step with individual corporations’ aggregate earnings data, the data can have an unexpected impact on growth.  The original 3Q09 corporate profits release indicated profits grew at 10.6%.

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 1.5% last week on a yearly basis.

10:00 a.m. EST: November’s Existing Home Sales (Risk: Neutral, Market Reaction: Significant): Pending home sales rose 3.7% in October, which should bode well for November’s existing home sales.  Existing home sales jumped 10.1% in October, primarily due to buyers rushing contracts to take advantage of the first time home buyer tax credit prior to its original expiration in November.  The supply of existing homes continued to fall to 7.0 months from 8.0 months in September. The current Bloomberg consensus forecast is for a rate of existing home sales of 6.25 million in November versus 6.10 million in October.

10:00 a.m. EST: FHFA House Price Index (Risk: Neutral, Market Reaction: Moderate): The Federal Housing Finance Agency (FHFA) monthly house price index is compiled by using loan data provided by Fannie Mae and Freddie Mac, which means all the data within the index consists of conventional mortgages within the limitations of the GSE’s.  The FHFA’s monthly purchase only index was unchanged in September, while August’s reading was revised down to -0.5% from -0.3%.  The monthly index tends to be relatively volatile, but should continue to trend up in-line with the Case-Shiller home price index.

Wednesday, Dec. 23

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 rose 0.3% last week after rising 8.5% a week prior.  Refinance applications rose modestly be 0.9%, while purchase applications fell -0.1%.  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.

8:30 a.m. EST: November’s Personal Income and Outlays (Risk: Neutral, Market Reaction: Significant): Personal income should continue to extend it gains, growing for a fifth consecutive month, while spending should also rise on stronger motor vehicle sales during November.  More importantly, headline and core CPI should remain relatively tame, placing inflationary concerns on the back burner, at least for the time being.  The current Bloomberg consensus forecast is for an increase in income of 0.5% (0.2% in October), and an increase in spending of 0.6% (0.7% in October), while core PCE is anticipated to rise a modest 0.1% (0.2% in October) in November.

9:55 a.m. EST: December’s Final Consumer Sentiment (Risk: Neutral, Market Reaction: Significant): December’s preliminary consumer sentiment index jump to 73.4 from a reading of 67.4 in November.  Improving market conditions and some better than anticipated labor data during the month should provide a modest bump in December’s final sentiment reading.  The current Bloomberg consensus forecast is for a reading of 73.5.

10:00 a.m. EST: November’s New Home Sales (Risk: Neutral, Market Reaction: Significant): As with existing home sales, new home sales likely rose in November.  The rate of new home sales in October was the highest rate since September 2008, and November’s release should be even higher.  The current Bloomberg consensus forecast is for the rate of new home sales to increase to 440K from 430K 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 an unexpected decline of -3.7 million barrels versus a drop of -3.8 million barrels a week prior.

Thursday, Dec. 24

8:30 a.m. EST: November’s Durable Goods (Risk: Neutral, Market Reaction: Moderate): Durable goods orders should recover a portion of October’s -0.6% decline on the back of stronger motor vehicle sales during the month.  The current Bloomberg consensus forecast is for an increment in durable goods orders of 0.5%, versus a drop of -0.6% a month prior. Unfortunately, last month’s number excluding the volatile transportation component fell -1.3%.  Additionally, an unexpected jump in civilian aircraft orders last month (+50%) may have been overstated and I anticipate this could lead to a strong drop of this component in November.

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims rose 7K last week to 480K, after rising 17K a week prior. Despite the increment in last week’s claim data the four week moving average improved to 467,500 from 473,750.  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.  The current Bloomberg consensus forecast is expecting claims to come in at 470K, a decrease of -10K from last 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 jumped last week to US$2.218trn from US$2.169trn, due increased purchases of 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, Dec. 25

All Markets Closed—Merry Christmas!

Enjoy the weekend!

Personal Income showed no change for September after a revised increment +0.1% in August, this was inline with the consensus forecast.  Personal Consumption Expenditures (PCE) declined -0.5% in September, versus a revised increment of +1.4% in August.  The decline in consumption is the continued aftereffects caused by the expiration of the US government’s ‘Cash for Clunkers’ program’.  The program significantly bolstered sales during the months it was active, by at least partially,  leading some consumers–who would have been purchasing over the current months–to buy earlier in order to take advantage of the discount.  Additionally, relatively benign income growth over the past several months is unlikely to help catalyze any significant jump in consumer spending.   This data is indicative that the strong bounce in 3Q09’s personal consumption component of GDP will likely not be repeated in 4Q09.  The good news is that the inflation component of the report remains at relatively subdued levels.

October’s Chicago Purchasing Managers Index rose to 54.2 from 46.1 in September easily beating expectations.  The new orders index jumped to 61.4 in October from 46.3 in September, while the production index climbed to 63.9 in from 47.2. The employment index reported a modest decline to 38.3 October from 38.8 a month prior, while the prices paid component fell to 48.6 from 51.3.  A large jump in October’s new order index should bode well for the headline number next month.

October’s final University of Michigan Consumer Sentiment Index rose to 70.6 compared to a preliminary reading in October of 69.4; September’s final reading was 73.5.  This was essentially inline with expectations, but the fact that the final release declined from last month highlights the fact that consumers remain nervous, which will likely adversely impact the holiday shopping season.

In other news, the employment cost index rose 0.4% in 3Q09, which continues to indicate that wage pressure remains relatively benign.  This will not go unnoticed by the FOMC, who will likely keep their policy stance unchanged through most of 2010.

Personal income rose 0.2% in August, after rising 0.2% in July.  Personal consumption expenditures climbed 1.3%, versus a 0.3% increment in July.  Most of August’s strength was due to increased durable goods purchases (+5.3) stemming from the residual effect from the US government’s Cash for Clunkers program.  Nevertheless, the consumption of services reached an 11 month high, but with a modest gain of only 0.4%.  August’s PCE price index remained relatively constrained with the headline PCE rising 0.3%, and the core PCE showing a 0.1% gain, both when annualized still well within the Fed’s comfort zone.

Personal income was flat in July, compared to a consensus forecast of 0.1%, and a previous decline of -1.1%.   Disposable income was unchanged. Despite the government’s ‘Cash for Clunkers’ program consumer expenditures rose by 0.2%%, compared to a consensus forecast of 0.3%, and a previous reading of 0.6%.  Continued weakness in the job’s market continues to adversely impact both spending and income.  The market seems to be interpreting this as positive news, regardless of no gains in consumer income.  This could make any rally based on this news today very fragile.  The savings rate fell to 4.2% from 4.5% in July.  The last recession this country faced ended with a consumer led recovery, supported by significant consumer credit growth; this time that will not be the case.  Until we see improvements in the labor market consumer income and spending will likely remain moot.

Monthly Changes in Income & Expenditures:

Source: BEA

This week looks to be another whirlwind week of significant economic releases coming from the consumer and housing sectors, along with an update on 2Q09 GDP growth.  In addition to this, Monday will see the end of the US government’s highly successful ‘Cash for Clunkers’ program, which over the course of its existence has positively impacted numerous economic indicators.  These week’s data could help support the recent rally, or build a stronger case for the bears.  Housing related data starts on Tuesday with the release of the Case-Shiller home price index, followed an hour later by the FHFA home price index.  This week’s housing announcements conclude on Wednesday with the release of new home sales, which has the potential to beat analysts’ forecasts. Turning to the consumer, the Conference Board’s Consumer Confidence Index will be released on Tuesday, and is expected to show marginal gains.  This report will be followed up on Friday by the final release of the Reuters/University of Michigan consumer sentiment report, which should experience a marginal upward revision. This week’s other notable releases include durable goods orders on Wednesday, the preliminary estimate of 2Q09 GDP on Thursday, and Personal Income and Outlays on Friday.  Here’s the rest of the calendar:

Monday August 24^th:

8:30AM: Chicago Fed National Activity Index (CFNAI-MA3) (Risk: Downward, Market Reaction: Marginal): The CFNAI is an index that consists 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 five months, and is expected to improve again in July from its reading of -2.1 in June.

Tuesday August 25^th:

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 decline of -0.9% in store sales compared to no change the previous week.

9:00AM: S&P Case-Shiller House Price Index (Risk: Neutral, Market Reaction: Moderate): The S&P Case Shiller HPI is reported monthly, but on a two month lag. May’s report showed a slight increment in 7 of the 10 metropolitan areas covered by the report on a monthly basis, with Los Angeles, Miami, and Las Vegas still showing declines, albeit at a lower rate. I anticipate July’s release will reaffirm that trend, with a continued slowdown in the rate of decline for home prices on a yearly basis . But, we would still need to see significant improvements in those regions, which were the hardest hit by the drop in prices that include Las Vegas, Miami, and San Francisco before we can see a strong overall recovery.

10:00AM: Consumer Confidence (Risk: Neutral, Market Reaction: Significant): The Conference Board’s Consumer Confidence Index could improve marginally in August after July’s reading of 46.6. The current Bloomberg Consensus forecast is for a reading in August of 48.0.  However, a lower than anticipated University of Michigan consumer sentiment index, released earlier this month, could place some downward pressure on this release.  Weakness in the labor market continues to weigh heavily on consumer confidence indices, but has been slightly offset by positive equity performance.

10:00AM: The Federal Housing Finance Agency (FHFA) House Price Index (Risk: Neutral, Market Reaction: Significant): The Federal Housing Finance Agency (FHFA) House Price Index (HPI) is compiled by using loan data provided by Fannie Mae and Freddie Mac, which means all the data within the index consists of conventional mortgages within the limitations of the GSE’s.  Investor’s will be focusing on the June purchase only index, which in May experienced a monthly gain of 0.9%, compared to a decline of -0.3% in April.  On a yearly basis the HPI was down 5.6% in May.  The monthly index tends to be relatively volatile, but should continue to trend up over the coming months with the Case-Shiller home price index. 

Wednesday August 26^th:

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 5.6%; while the refinance index rose 6.9% and the purchase index rose 3.9% on the back of relatively low mortgage rates and declining home prices.

8:30AM: Durable Goods Orders (Risk: Upside, Market Reaction: Significant): Increased motor vehicle and commercial aircraft orders in June should help provide some upward momentum for durable goods orders in July.   The current Bloomberg consensus forecast is for an increment of 2.5%, compared to the previous month’s decline of 2.2%.  Thanks to the US government’s ‘Cash for Clunkers’ program auto orders could see a double digit gain during the month, which hasn’t happened since 2003.  But, the program is scheduled to end Monday (8/24).

10:00AM: New Home Sales (Risk: Upside, Market Reaction: Significant): On the back of a much higher than anticipated level of existing home sales, new home sales should encounter some upward momentum in July.  The current Bloomberg consensus is for a sales rate of 390K units, compared to last month’s reading of 384K units.  Recent increments in the NAHB’s homebuilder index have led to an increase in the number of housing starts and permits, which could indicate a bottom for residential real estate.

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 unexpected decrease in inventories of -8.4mn barrels after rising 1.1mn a week prior.

11:30AM: Dennis Lockhart, Atlanta Federal Reserve Bank President, addresses the Chattanooga Area Chamber of Commerce.

Thursday August 27^th:

8:30AM: GDP (Risk: Downside, Market Reaction: Significant): The preliminary estimate of 2Q09 GDP will likely be revised downward from the advance estimate of -1.0%.  The current Bloomberg consensus is for a revision to -1.5%.  The adjustment will come from negative revisions to inventory investment, business fixed investment, and personal consumption.  These will be marginally offset by small positive adjustments to government spending and net exports.  The GDP price index will likely remain unchanged at 0.2%.

8:30AM: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims unexpectedly rose last week by 18K to 576K. Despite the increments experienced over the past two weeks, 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 550K.  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.

8:30AM: Corporate Profits (Risk: Neutral, Market Reaction: Marginal): The importance of this release is somewhat muted given its timing toward the end of the 2Q09 earnings season.  However, since these profits tie into GDP growth they do not always move lock step with individual corporations’ aggregate earnings data.  In 1Q09 corporate profits reportedly grew around 4%, this positive trend will likely continue.

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$2.037trn from US$1.999trn 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.

5:00PM: James Bullard, St. Louis Federal Reserve Bank President, speaks to the University of Arkansas MBA program.

Friday August 28^th:

8:30AM: Personal Income and Outlays (Risk: Neutral, Market Reaction: Significant): Personal income may see a marginal improvement in July supported by a modest increment in wage and salary income.  The current Bloomberg consensus forecast is for an increment in personal income of 0.1%, compared to June’s dismal reading of -1.3%.  Despite the government’s ‘Cash for Clunkers’ program, consumer spending is unlikely to experience any significant gains, as the labor market continues to deteriorate.  The current Bloomberg consensus for consumer spending is a monthly increment of 0.3%, compared to June’s reading of 0.4%.

9:55AM: Consumer Sentiment (Risk: Neutral, Market Reaction: Significant): Considering recent positive financial and economic news, the Reuters/University of Michigan preliminary consumer sentiment number, released earlier this month, will likely be revised up marginally.  The current Bloomberg consensus forecast is for a reading of 64.0, compared to the preliminary reading of 63.2.  But, this is still below July’s final reading of 66.0.

Enjoy the weekend!