Ecominic Outlook For The Week Of Feb.25th-29th
Despite morning advances Treasuries suffered mild losses on the day as traders began positioning for new supply coming to market next week. The stock indices spent most of the day in negative territory but rallied in the last hour of trading and finished up in the green. In late trading, the 10-Year Treasury Note was down by 7/32, raising its yield to 3.80%; the Dow was up by 96.72 points to 12,381.02; and the Nasdaq was up by 3.57 points to 2,303.35.
Next week, the economic release calendar kicks off on Monday with the report on existing home sales for last month. December's report was weaker than expected but was not too surprising given the battered state of the housing market. The National Association of Realtors said the seasonally adjusted, annualized pace of sales fell by 2.2% from 5.00 million to a ten-year low of 4.89 million. The consensus prediction was for a decline of 1.0% to a 4.95 million pace.
The lack of buyers caused home prices to decline. Average home prices slipped by only $800 to $254,900 but November's originally reported $256,800 was revised down to $255,700. December's price was 4.9% lower than a year earlier. The median home price eased by $300 to $208,400 but November's originally reported $210,200 was revised down to $208,700. December's price was down on a year-over-year basis by 6.0%.
Weak sales levels and falling home prices resulted in fewer homes being put on the market. Inventories of homes for sale fell by 7.4% to 3.905 million. Despite the decline, the low sales pace lowered the turnover rate from 10.1 months to 9.6 months.
January's report is expected to show another decline in the sales rate. Current predictions are for a drop of 1.8% to a 4.80 million pace.
On Tuesday, a key inflation indicator will be released. This is the Producer Price Index (PPI), a gauge of price changes at the wholesale level. The seasonal adjustment factors for the index data were recently recalculated and revised historical data was released today. The following details are based on the new information.
In December, the index declined by 0.3%. But this came after a spike in November of 2.6%, the largest jump in over three decades. A major factor behind November's jump was an 11.4% rise in the price index for energy -- the biggest increase in almost eighteen years. It fell by 3.0% in December.
Another volatile category is food and its price index rose by 0.3% in December, the largest increase since May. Excluding both food and energy, the so-called core index rose by 0.2%.
Prior to today's revised numbers, analysts had predicted a rebound of about 0.4% following the originally reported decline of 0.1% in December. Because of the revision to December's index change, the actual bounce in January may have been even larger than the previous forecast. Though the core reading is still expected to have risen by a tame 0.2%, a higher overall reading would likely get the most attention and would depress both the stock and bond markets.
Later on Tuesday morning, the independent research firm, the Conference Board, will release its index data on consumer confidence for the month. In January, the index came in at 87.9. The reading was down from December's but December's had been revised up from 88.6 to 90.6. With the exception of a slightly lower reading in November of 87.8, January's was the lowest since October of 2003. Consumers' outlook for the future dimmed as the expectations index fell to 69.6 from 75.8. The index of present conditions actually rose in January from 112.9 to 115.3.
In light of recent bearish economic data including January's first decline in the seasonally adjusted level of nonfarm payrolls in over four years, analysts believe that the confidence index declined again this month. Predictions call for an overall reading of about 83.0.
On Wednesday, the situation in the manufacturing sector will be highlighted by the report on durable goods orders for January. 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 December said that the seasonally adjusted level of orders rose by 5.2%. Though this was subsequently revised down by 5.0% in the factory orders report, it was still the largest jump since last July. The following data is from the revised figures.
The large but volatile category of transportation saw in increase of 11.5%. But even excluding the category, orders were up by 2.3% following a 0.5% decline in November. In the category excluding the defense sector, orders were up by 2.7%. This category is considered significant since defense orders are not subject to standard market forces. Defense orders rose by 66.4% in December as orders for defense aircraft and parts spiked up by 139.9%.
Another closely watched category is that of non-defense capital goods orders excluding aircraft -- seen as an indicator of core business demand. Order there rose by 4.5% in December, the largest increase since last March.
Transportation orders for January are expected to have fallen so forecasters are predicting that the overall order level fell by about 4.0%. A slight decline is also anticipated in the ex-transportation category.
The report on new home sales for January will also be released on Wednesday. In the last report, the Commerce Department said that the seasonally adjusted, annualized pace of sales fell by 4.7% in December to 604,000 from November's revised pace of 634,000 (originally reported as 647,000). December's pace was the lowest since March of 1993.
The number of new homes on the market fell by 2.0% to 495,000, the lowest inventory level since October of 2005. Despite the lower supply, the decline in demand pushed the average home price down by $43,900 to $267,300. This was a 14.1% drop from November's level and was down by 11.5% on a year-over-year basis. The median home price fell by $26,700 to $219,200. This was down by 10.9% month-to-month and by 10.4% year-over-year.
For January, forecasters are predicting another but smaller decline in the pace of home sales to about 600,000.
On Wednesday afternoon, the Treasury will be conducting its monthly auction of 2-Year Notes. The demand for last month's issue was generally weak. Bids exceeded the $24 billion offer amount by 2.33 to 1, up from the 2.23 bid-to-cover ratio in December's auction and the 2.21 ratio in November. But it was still well below the 2.86 average for the twelve auctions preceding last month's. Noncompetitive bids, a gauge of individual investor demand, totaled $597 million, up from $525 million in December but far short of the twelve-issue average of $745 million.
Of particular concern: foreign demand was extremely weak. Indirect competitive bids, which include those from foreign central banks, garnered just 18.8% of the issue, down from December's 25.4% award portion and below the twelve month average of 29.7%.
Tuesday's issue is also expected to have a face value of $24 billion. The deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon.
Thursday brings the jobless claims report. In yesterday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 9,000 to 349,000. While the drop is technically a positive economic indicator, the news of the decline was offset somewhat by the fact that the previous week's originally reported level of 348,000 was revised up to 358,000.
In addition, the level was still high by recent historical standards. The four-week moving average, which smoothes out some of the short-term volatility, rose by 10,750 to 360,500, the highest reading since October of 2005. For all of 2007, the average weekly reading of initial claims was 322,135.
The report said that continuing claims in the week of February 9 (continuing claims must be at least a week old) rose by 48,000 to 2.784 million. The four-week average rose by 28,750 to 2,752,500. Both readings were the highest since October of 2005. The weekly average of continuing claims in 2007 was 2,551,231.
Also on Thursday, the Commerce Department will release its first revision to last month's initial estimate of fourth quarter gross domestic product (GDP). 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. A final report on the fourth quarter will be released next month.
Last month's advance report said economic growth in the last three months of 2007 increased by 0.6% following a 4.9% increase in the previous three months. But due in part to a smaller than expected trade gap reported for December and a higher than previously expected increase in business inventories, analysts feel that the preliminary GDP report will be stronger than last month's. But the consensus projection is for a reading of only 0.7% or 0.8%.
On Thursday afternoon, the Treasury will sell its monthly issue of 5-Year Notes. The face value is expected to be $14 billion, matching last month's issue. Like the 2-Year offering, last month's 5-Year Note auction was met with weak demand. The bid-to-cover ratio was 2.16, the lowest in six months. Noncompetitive bids totaled just over $81 million, the smallest amount since the auction held in October of 2005. Foreign demand was also on the light side. Indirect competitive bids garnered 21.1% of the issue, down from December's award portion of 28.4% and below the 26.0% average for the twelve auctions preceding January's.
On Friday, the report on personal income and spending for last month will be released. In the last report, the Commerce Department said that personal income, the fuel for consumer spending, rose in December by 0.5%, up from November's 0.4% increase. Personal consumption expenditures (spending) rose by 0.2%. The spending gain was the smallest in six months and November's originally reported rise of 1.1% was revised down to 1.0% and October's previously reported gain of 0.4% was trimmed to 0.3%.
For January, income is expected to have risen by about 3.0% and spending is expected to have risen by another 0.2%.
Friday also brings a major regional manufacturing indicator, Chicago's Purchasing Managers Index (PMI). In January, it came in at 51.5. Any reading over 50.0 indicates a general expansion of activity in the highly-industrialized region relative to the preceding month. But January's growth indicator was much weaker than December's reading of 56.4 and was the lowest index since October's slight contraction reading of 49.7.
The index is expected to have edged down once again. A reading of 50.0 or slightly lower is predicted. But traders will be closely watching this release since the New York and Philadelphia indices for this month were much lower than expected. On their index scales, a reading below 0.0 indicates a contraction of activity and the New York Index came in at -11.72, the weakest reading since April of 2003, and the Philadelphia index came in at -24.0, the lowest reading since February of 2001.
The national index for January came in at a near-neutral 50.7 following a contraction reading of 48.4 in December. The index for February will not be released until March 3 but forecasters feel that it will reveal another modest contraction indicator of about 49.0. A weaker than expected Chicago reading would lower the prediction for the national index.
The last release of the week is the final read on consumer sentiment from the twice monthly survey conducted by the University of Michigan. According to news sources, the preliminary index, released last Friday, fell sharply from January's final reading of 78.4 to a sixteen year low of 69.6. The final reading for the month is expected to be only slightly better at 70.0.
