On Monday, housing takes center stage once again as the report on new home sales for last month will be released. In November's report, the Commerce Department that that the seasonally adjusted, annualized pace of sales fell by 9.0% to 647,000. In addition, October's previously reported rate of 728,000 was revised down to 711,000, September's 716,000 was revised to 699,000, and August's 717,000 was revised to 701,000.
November's pace was the lowest since April of 1995 and much lower than forecasters' predictions of 720,000. Inventories of homes on the market fell for an eighth month to 505,000, the lowest level (seasonally adjusted) in two years. But given the declining sales rate, the inventory represented 9.3 months of sales. Though last August's 9.4 month supply was slightly higher, November's was the second highest since October of 1981.
The average new home price fell in November by $14,600 to $293,300 from October's average but the price was 0.5% higher than the previous November. The median price rose by $9,600 to $239,100 but was 0.4% lower than a year earlier.
For December, the sales rate is expected to have fallen once again by about 1.1% to 640,000.
The first of next week's two Treasury note auctions will be held on Monday. The offering is the monthly issue of 2-Year Notes. Last month's sale met with lukewarm demand. Bids exceeded the $22 billion offer amount by 2.23 to 1, slightly better than the 2.21 bid-to-cover ratio in November's auction but below the average of 2.88 for the twelve issues preceding December's. Noncompetitive bids, a gauge of individual investor demand, totaled $525 million, down from $617 in November and below the twelve month average of $765 million.
Foreign demand was relatively soft. Indirect competitive bids, which include those from foreign central banks, garnered 25.4% of the issue. Although this was up slightly from November's award portion of 23.5%, it was down from the twelve month average of 30.4%.
The issue size has been trending up and next week's offering is expected to have a face value of $24 billion. If this is accurate, it would be the largest offering since April of 2005. The larger size may dilute demand.
On Tuesday, the first release of the day is the report on durable goods orders for last month. Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.
The report for November said that the seasonally adjusted level of orders rose by 0.1% but this was subsequently revised in the factory orders report to a decline of 0.1%. The move was more bearish than expected, especially considering the fact that it marked a fourth consecutive monthly decline -- an unusual occurrence in the data series. Consequently, a rebound of between 1.5% and 2.0% is predicted for December.
Later on Tuesday morning, the Conference Board, and independent research firm, will release its index figures on consumer confidence for this month. In December, the overall index came in at 88.6, up from an upwardly revised 87.8 in November (originally 87.3). Forecasters had been looking for a reading closer to 87.0. However, while the expectations index rose to 75.5 from 69.1 (originally 68.7), the index of consumers' assessments current conditions fell to 108.3 from 115.7 (originally 115.4).
Despite the increase in the overall index, Lynn Franco, director of the board's Consumer Research Center, summarized the data this way: "This month's slight gain in Confidence was due solely to an increase in the Expectations Index. Consumers' short-term outlook regarding business conditions, employment, inflation, and stock prices improved marginally. However, while consumers are less negative about the near-term future, they remain far from optimistic. Furthermore, persistent declines in the Present Situation Index indicate the economy is still losing momentum. In fact, in assessing the current job market, pessimists now outnumber optimists. Regarding business conditions, the gap between the two is almost nonexistent."
A weaker confidence index is predicted for January with general forecasts ranging between 87.0 and 88.0.
Tuesday brings more Treasury supply in the form of the monthly 5-Year Note issue. Like the 2-Year issue, last month's 5-year issue met with lukewarm demand. The bid-to-cover ratio was 2.31, up from November's 2.26 but below the twelve-month average of 2.47. Noncompetitive bids totaled just $85 million, the smallest amount in a 5-Year offering since October of 2005.
Foreign demand was decent but not exceptional. Indirect competitive bids garnered 28.4% of the issue, up from November's award portion of 21.0% and slightly higher than the twelve month average of 27.7%.
On Wednesday, the Commerce Department will release the first -- or advance -- estimate of gross domestic product (GDP) for the fourth quarter. GDP is the market value of all final goods and services produced by labor or property in the country in a year?s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy. This month's advance report will be followed by a preliminary report in February and a final report in March.
According to last month's final report for the third quarter, GDP rose at an annualized rate of 4.9% in the July through September period. This was the strongest increase since the third quarter of 2003.
Economic activity is expected to have decelerated in the fourth quarter. Residential investment has continued to sag and the latest report on international trade revealed a sharp widening of the trade gap in November. Nevertheless, analysts believe the rate of economic activity grew by about 1.5% last quarter.
The Federal Open Market Committee (FOMC), the monetary policy arm of the Federal Reserve, will conclude its two day meeting on Tuesday. Between June of 2006 through early August of 2007, the Fed took no rate action but maintained a slightly hawkish (that is, tightening) bias, citing elevated core inflation and concerns that it might not abate as expected.
But the troubled housing and mortgage industries began to obstruct credit flows since investors backed away from risky mortgage debt, thereby eroding its value. Consequently, lenders in general tightened loan standards, making it harder to borrow money. In the meantime, holders of mortgage loan products have suffered losses since buyers are scarce. This bottleneck reduces the amount of money flowing through the monetary system and drives up the cost of borrowing.
With the complex network of risk-sharing in the world markets, the credit troubles spread and the Fed finally stepped in and made an emergency 0.50% cut to the discount rate last August. The discount rate is the interest rate charged to banks for loans directly from the Fed. This brought the rate down from 6.25% to 5.75%. In addition, the committee extended the length of time reserves could be borrowed and it made a public relations push to diminish the negative connotations attached to such borrowing (loans from the Fed were typically considered last resort measures).
Nevertheless, short-term commercial debt offerings dried up and investors flocked to the safety of government backed securities. In order to ease the credit situation, the Fed decided in its September meeting to cut its target for the fed funds rate, the rate banks charge each other for overnight loans, by 0.50%, from 5.25% to 4.75%. This was the first rate cut since June of 2003 and the largest since November of 2002. The policy committee also cut the discount rate again by 0.50% from 5.75% to 5.25%.
Then, in October's meeting, the committee cut both rates once more but by 0.25%, bringing the fed funds rate down to 4.50% and the discount rate to 5.00%. They cut both rates again in December's meeting by 0.25%, reducing the fed funds target to 4.25% and the discount rate to 4.75%.
The Fed took additional action in December to bolster liquidity. Because borrowing directly from the Fed is traditionally perceived as a sign that a bank is in trouble, this source of funds has been avoided even though the repayment period was extended in August and the Fed urged banks to use the service. In order to keep monetary flows from bogging down, the Fed instituted a Term Auction Facility (TAF), a temporary program whereby short-term funds can be obtained on an auction basis using a broad range of collateral. The auctions have been held on a bi-weekly basis since mid-December.
Earlier this week, economic jitters sent global stock markets into a nosedive and before the U.S. market opened on Tuesday following the three-day weekend, the Fed announced that the policy committee had conducted an emergency meeting and decided to cut both the fed funds target and the discount rate by 0.75%, bringing them down to 3.50% and 4.00%, respectively.
The questions now confronting traders are: will the Fed cut again next week and if so, by how much? Many observers seem to think that more cuts are forthcoming as the price of the fed funds futures contract suggests that a cut of at least 0.25% will be made and possibly a 0.50% cut. No matter what the outcome, some traders will find themselves in the wrong position and the markets are likely to react strongly to the policy announcement. It is usually released at about 2:15 PM Eastern Time.
On Thursday, the jobless claims report will herald the approach of Friday's employment report even though the data collection periods for the two do not coincide. In yesterday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits slipped by 1,000 last week to 301,000. The previous week's originally reading of 301,000 was revised to 302,000. The latest decline was the fourth in as many weeks, bringing the level to a seventeen-week low.
The recent movement may have been exaggerated by faulty seasonal factors associated with the holidays. Forecasters had been looking for a bounce following the previous three week's of decline, which totaled 55,000. Despite the possible holiday distortion, the latest initial claims figures point to an increase in payroll growth. Any reading below 400,000 suggests that hiring is outpacing layoffs.
The four-week moving average, which smoothes out some short-term volatility, fell by 14,000 to 314,750, the lowest level since early October. The average weekly reading for all of last year was 322,135. In the first three weeks of this year, the average is 308,333.
The report said that the level of continuing claims for the week ending January 12 (continuing claims must be at least a week old) fell by 75,000 to 2.672 million, the lowest reading in five weeks. The four-week average fell by 10,250 to 2,715,250. Unlike the initial claims data, continuing claims remain above trend. For all of 2007, the average weekly reading was 2,551,231.
Forecasters predicted a bounce in the initial claims level for the last two weeks and they are not changing their position now despite the ongoing slide. An increase of between 10,000 and 20,000 is anticipated for this week's claims level.
Thursday also brings the Employment Cost Index, a measure of the seasonally adjusted level of compensation costs for all civilian workers. The index is a more comprehensive gauge of labor costs than the wage data contained in the monthly employment reports because it also incorporates salaries and employer costs for non-cash employee benefits.
The ECI rose by 0.8% in the third quarter following a 0.9% rise in the second. Salaries and benefits both saw an increase of 0.8%. The salary increase was the same as in the second quarter but the rise in benefits was a deceleration from the 1.3% second quarter increase. For the fourth quarter, the index is expected to have risen again by 0.8%
Another early release on Thursday is the report on personal income and spending for last month. In November's report, the Commerce Department said that personal income, the fuel for consumer spending, rose by 0.4% compared with a 0.2% increase in October. But personal consumption expenditures (PCE or spending) surged by 1.1%. This was the largest monthly PCE increase since July of 2005 and was much stronger than predictions of an 0.8% rise. October's originally reported increase of 0.2% was also revised up to 0.4% and September's 0.3% increase was revised to 0.5%.
An unwelcome inflation indicator in the report was a 0.6% rise in the PCE price index, the largest increase since September of 2005. Most of the hike was due to energy prices, however. Excluding food and energy, the so-called core price index was up by just 0.2%.
For December, personal income is expected to have risen again by 0.4% but spending is expected to have risen by just 0.1%. The spending increase would be the smallest since September of 2006.
The final economic release on Thursday is the Chicago Purchasing Managers Index, a gauge of manufacturing activity in the highly-industrialized region. The index came in at 56.6 in December, up from November's 52.9 and higher than analyst predictions of 52.0. Any reading over 50.0 reflects a general increase in activity relative to the preceding month. December's reading was the strongest in six months. A slightly weaker growth reading of 53.0 is predicted for January's reading.
While the Chicago PMI is often viewed as an indicator of how the national index will move, the correlation between the indices has not been strong lately. In the last twelve months, they have moved in the same direction only four times.
On Friday, the employment report will figure prominently in market activity. In November's report, the Labor Department said that the seasonally adjusted level of nonfarm payrolls rose by 18,000. While this was a fifty-second straight month of job growth, it was the weakest of them and fell well short of analyst predictions of an increase of 70,000. An upward revision to November's originally reported rise of 94,000 to 115,000 was little consolation as October's previously reported gain of 170,000 was trimmed to 159,000.
Besides the weak job growth, observers were startled by the reported jump in the unemployment rate, the percent of the active workforce without jobs, from 4.7% to 5.0%. The size of the jump in the unemployment rate was the largest since October of 2001 and the rate was the highest in two years.
Forecasts for January call for an increase in nonfarm payrolls of between 55,000 and 60,000. The unemployment rate is expected to have remained at 5.0%.
Another major release on Friday is the index on the nation's manufacturing sector from the Institute for Supply Management (ISM). The index came in at 47.7 for December following a reading of 50.8 in November. Like the Chicago PMI, any reading below 50.0 indicates a general contraction of activity and December's contraction was the first since January of 2006 and the weakest index reading since March of 2003.
Estimates for January's reading range from 47.0 to 48.5. This would mark the first back-to-back contractions since 2003.
The housing sector gets another once-over on Friday when the report on construction spending for last month comes out. In November's report the Commerce Department said the seasonally adjusted, annualized pace of construction spending rose by 0.1% following a decline in October of 0.4%.
But November's gain was due to an increase in the nonresidential category. The rate of residential construction spending fell by 2.4%. This followed a 2.3% decline in October and a 2.2% decline in September. In fact, November's was the twenty-first consecutive decline in the residential sector and the pace was the lowest since September of 2003.
The residential construction spending rate is expected to have fallen again in December, helping to push the overall spending rate down by about 0.5%.
The final economic release of the week is the final read on consumer sentiment for the month from the twice-monthly surveys by the University of Michigan. The preliminary index, released a week ago, came in at 80.5, up from December's final reading of 75.5. The increase was the first in six months and the reading was the highest in three months. Forecasters had been predicting another decline to about 75.0.
The expectations index came in at a three-month high of 69.1. December's final index was 65.5. The best progress was made in consumers' assessments of current conditions. The index for this rose from 91.0 to 98.1, the highest reading in five months. Recent events (Fed rate cut, proposed economic stimulus package, stock market gyrations) make it difficult to predict how consumer sentiment may have changed in the latter part of the month.
