|
Many had hoped that equities would rebound this past week on an expected economic boost from pending implementation of the Administration’s fiscal stimulus plan and housing bailout. But economic news was dour and negative company news continued to roll out. Additionally, the Fed lowered its forecast for economic growth, further damping the mood on Wall Street. Fears of bank nationalization weighed on the markets as well. In the mean time, investors looked for safe havens.
 There was good news and bad news for equities this past week. The good news for stocks was that in the U.S. markets were closed for the Presidents Day holiday. After that, it was all downhill. Stocks tumbled sharply on Tuesday with the Dow coming within a hair of its November 2008 low. Banks led equities down as traders grew increasingly concerned over further likely losses and increased chatter that banks will have to be nationalized. Credit card companies also hurt financials as American Express and Capital One reported increased default rates. General Motors submitted its restructuring plan to the Treasury Department on Tuesday, but investors were not inspired as GM’s stock sank 13 percent, also pulling down the Blue Chips. The view that GM eventually will file for bankruptcy is becoming the more common belief. Later in the week, GM’s SAAB unit did file for bankruptcy in Sweden. A further reflection of how the economy is doing is the fact that the only Dow component to rise on Tuesday was Wal-Mart as consumers downgrade their shopping habits to the discounters.
President Obama’s plan to stop many housing foreclosures was unveiled on Wednesday but it had to compete with the Fed’s sharply lower forecast for the economy in 2009. The Fed report shows much more negative numbers for projected GDP and higher figures for the unemployment rate.
Stocks ended the week sharply lower with trading largely technical on the last day. The Dow closed the week at a 6-year low. Worries over nationalization of banks also continued on the last trading day. Stocks did get a little lift Friday afternoon on comments from an Obama Administration spokesperson that nationalizing banks is off the table. Bank stocks also were hurt during the week by comments from financial industry analyst Meredith Whitney that she expects banks to cut dividends from current levels.
Overall, poor economic data, continued worries over the financial sector, and lack of confidence in stimulus and financial bailouts weighed on equities heavily for the week.
Equities were down sharply this past week. The Dow was down 6.2 percent; the S&P 500, down 6.9 percent; the Nasdaq, down 6.1 percent; and the Russell 2000, down 8.3 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 16.1 percent; the S&P 500, down 14.7 percent; the Nasdaq, down 8.6 percent; and the Russell 2000, down 17.7 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Bond yields were whipsawed this past week from economic and financial crosscurrents. Yields were pushed down at the start of the week by both a negative Empire State manufacturing report and on heavy flight to safety on Tuesday’s plunge in equities. Thursday saw a jump in longer maturity yields on the unexpected spike in producer prices both at the headline and core levels – raising the specter of building inflation pressures. But flight to quality on the last day of the week helped rates ease again after another drop in equities. Overall, most yields declined for the week on negative economic news and flight to safe havens.
 For this past week, key Treasury rates were down as follows: 3-month T-bill, down 2 basis points, the 2-year note, down 3 basis points; the 5-year note, down 6 basis points; the 10-year bond, down 13 basis points; and the 30-year bond, down 10 basis points.
Inflation concerns and worries over pending heavy supply of Treasuries to fund trillion dollar federal deficits are keeping long rates somewhat elevated. But flight to safety has temporarily eased long rates.
 Spot prices for West Texas Intermediate rose moderately for the week net. But early in the week, traders actually were paying attention to the economic news. A worsening in the Empire State manufacturing index, housing starts, and industrial production bumped prices down. But prices spiked on Thursday with an unexpected drop in inventories in the holiday-delayed government petroleum report.
Net for the week, spot prices for West Texas Intermediate rebounded $1.43 per barrel to settle at 38.94.
Most of the economic news was bleak this past week, with the latest reports pointing to further slides in housing and manufacturing. Even what has been positive news—easing inflation—reversed course with gains in the CPI and PPI. The only notable good news was from the index of leading indicators and even it was more of a head fake than reality.
 Nearly every economist points to the need for housing to recover so the overall economy can make a comeback. But so far, that is not happening. Starts continued to freefall in January with a 16.8 percent decline, following a 14.5 percent plummet in December. The January pace of 0.466 million units annualized was down 56.2 percent year-on-year. The drop in starts was led by the multifamily component which fell a hefty 27.9 percent while the single-family component fell 12.2 percent.
Permits also showed no signs of stabilizing, posting a 4.8 percent decrease in January, after a December fall of 11.1 percent. The January permit pace of 0.521 million units annualized was down 50.5 percent year-on-year. However, permits were not as weak as starts. When starts diverge significantly from permits, it is usually weather related since you actually have to go outside to make a start happen. Unusually cold or rainy weather in the winter can dampen seasonally adjusted starts but not so much permits since that’s an office matter. So, while the starts level is likely to remain very low, we may see a weather-related bump up in starts next month.
 Both of the key goods-producing sectors continued to pull the economy down early in the first quarter. Overall industrial production in January fell another 1.8 percent, following a 2.4 percent plunge the month before. The all-important manufacturing component decreased a sharp 2.5 percent after plunging 2.9 percent in December. For the other major components in January, utilities posted a 2.7 percent gain while mining output dipped 1.3 percent.
 The sizeable manufacturing component saw broad-based weakness but was led downward by a drop in motor vehicle assemblies, reflecting to a degree shutdowns by some auto manufacturers for the month. Notably, every major industry group was down except for two—food & tobacco products and miscellaneous.
Overall capacity utilization in January slipped to 72.0 percent from 73.3 percent the month before and came in below the consensus projection for 72.5 percent. Capacity utilization is at its lowest since 70.9 percent seen in December 1982.
 The slowing in the plunge in manufacturing in January did not last long. Both the Empire State and Philly Fed manufacturing indexes turned more negative in February. The Empire State's general business conditions index in February dropped more than 12 full points to minus 34.7. Meanwhile, the new orders index fell nearly 8 points to minus 30.5. Both these readings are record lows for the series going back to July 2001.
The Philly Fed downturn was even worse. The Philly general business conditions index fell 17 points to minus 41.3—which is the lowest level since minus 48.2 set in October 1990. Shipments, orders and unfilled orders also showed deterioration in the latest month.
However, prices paid and received are still soft for both manufacturing regions. Both sets of price indexes remain notably negative.
 Those worrying about Fed easing and fiscal stimulus leading to rising inflation in the future got early confirmation that they should keep on being concerned. In January, consumer price inflation made a u-turn, ending three months of decline in the overall index. The headline CPI rebounded 0.3 percent in January, following a 0.8 percent drop the month before. Meanwhile, core CPI inflation firmed to 0.2 percent after no change in December. Headline inflation was led upward by energy in January. Energy rebounded a monthly 1.7 percent, with gasoline rising 6.0 percent. Food edged up a modest 0.1 percent.
 While energy was the obvious culprit behind the boost in headline inflation, there were a number of factors that caused the core rate to firm. Medical care rose 0.4 percent in the latest month—probably a little high compared to trend but a reminder that health care costs are a long-term issue. Some housing costs may have been worsened by the recession and credit crunch. Owners’ equivalent rent rose to 0.3 percent. This subcomponent is imputed and tied to rent costs which may be kept high by reduced ability to move into purchased housing. Finally, it looks like a lot of discounting by retailers took place in December rather than January, meaning on a seasonally adjusted basis, we get a bump in January. Case in point—apparel rebounded 0.3 percent in January after a 0.6 percent fall the month before. The bottom line is that core inflation is probably a little softer than January’s number suggests.
Year-on-year, headline inflation is down 0.2 percent (seasonally adjusted) in January from down 0.1 percent in December while the core is up 1.7 percent, unchanged from December.
 Not only did consumer prices rebound in January but so did inflation upstream for manufacturers. The PPI in January jumped sharply - both at the headline and core levels. The overall PPI rebounded 0.8 percent, following a 1.9 percent fall in January. Meanwhile, the core PPI rate surged 0.4 percent after a 0.2 percent increase the month before. For the latest month, headline inflation was pumped up by a jump in energy which increased 3.7 percent after a 9.1 percent fall in December. Food actually fell 0.4 percent in the latest month.
 Markets were nervous about the 0.4 percent spike in the core rate when the news was released. But there were likely temporary factors at play. Pharmaceuticals jumped 1.1 percent while tobacco spiked 0.6 percent. Pharmaceuticals can be sporadic as price changes by drug companies can be infrequent and lumpy. Changes in tobacco prices also can be sporadic and difficult to seasonally adjust. Prices for light trucks increased 0.5 percent and may be coming off earlier discounting.
For the overall PPI, the year-on-year rate dipped to minus 1.3 percent in January from down 1.2 percent the month before (seasonally adjusted). The core rate eased to up 4.2 percent from up 4.3 percent in November.
The bottom line is that the core trend is not as bad as the January number but price pressures have not gone away.
 The Conference Board’s index of leading indicators posted a second consecutive gain – but the improvement has been largely due to just one or two components spiking. The index of leading economic indicators rose 0.4 percent in January reflecting a huge jump in money supply as the Fed and Treasury have been injecting massive amounts of funds into the banking system to provide relief to credit markets. Without money supply, the leading index would have slipped 1 tenth in the latest month. Also, the spread between the 10-year Treasury note and fed funds rate widened, adding to the leading index. But instead of the wider spread being due to a drop in the fed funds rate, it was because of a rise in the Treasury note! In real life, this is a negative. In terms of what actually was reported down, initial jobless claims were the biggest negative in January. Finally, in case you didn’t know it, the recession is still on - according to the coincident index. It fell 0.5 percent in January.
Along with everyone else, the Fed has lowered its view of the trajectory of the economy. The minutes of the January 27-28 FOMC meeting reported that the FOMC participants sharply cut their forecast for economic growth. On the positive side, they saw risks on the downside with little risk of higher inflation in the near term. They expect significantly lower headline and core inflation during the next few years.
The biggest news out of the minutes of the January 27-28 FOMC meeting were the revisions to the economic forecasts by the Fed governors and regional bank presidents. The forecast contraction in GDP for 2009 was lowered significantly.
"Participants’ projections for the change in real GDP in 2009 had a central tendency of -1.3 to -0.5 percent, compared with the central tendency of -0.2 to 1.1 percent for their projections last October. In explaining these downward revisions, participants referred to the further intensification of the financial crisis and its effect on credit and wealth, the waning of consumer and business confidence, the marked deceleration in global economic activity, and the weakness of incoming data on spending and employment.“
The good news is that the FOMC sees light at the end of the tunnel with a rebound in economic growth in 2010. The bad news is that for a recovery, the anticipated growth rates are rather sluggish.
"Looking further ahead, participants’ growth projections had a central tendency of 2.5 to 3.3 percent for 2010 and 3.8 to 5.0 percent for 2011."
Not surprisingly, the forecast for the unemployment rate jumped significantly
"Participants’ projections for the average unemployment rate during the fourth quarter of 2009 had a central tendency of 8.5 to 8.8 percent, markedly higher than last December’s actual unemployment rate of 7.2 percent—the latest available figure at the time of the January FOMC meeting."
The forecasts for both headline and core PCE inflation were lowered sharply. The FOMC central tendency for 2009 is now 0.6 to 1.5 percent Q4/Q4 growth and that for 2010 is 0.4 to 1.7 percent.
The bottom line is that the latest Fed minutes show the FOMC well aware of how deep the recession is and that focus is on boosting the economy through low interest rates and further credit easing.
Economic data clearly are showing the recession getting worse. Meanwhile, the Fed is easing as hard as it knows how but businesses and consumers alike have retrenched and it’s going to take time and fiscal stimulus to get the economy moving forward. The financial markets have taken note and lowered their valuations for equities.
This coming week the two market movers are durables orders and GDP. But housing is still a focal point and markets will be paying attention to the new home and existing home sales reports.
The Conference Board's consumer confidence index sank further to 37.7 in January from 38.6 in December. The January level set a record low in more than 40 years of data. Weakness was centered in the present situation but expectations were also weak. Looking ahead, confidence is not likely to bump up much anytime soon. Jobless claims continue upward, job openings have been declining, the news from the stock market has been depressing, and even gasoline prices have edged back up. And, so far, neither Congress nor the Administration have inspired confidence in a recovery coming soon.
Consumer confidence Consensus Forecast for February 09: 35.5
Range: 31.0 to 42.0
Existing home sales unexpectedly jumped 6.5 percent in December to a 4.740 million unit annual rate. But it is hard to say that the gain was real. Certainly, there is the argument that lower mortgage rates and lower house prices are now boosting home sales. But an alternative view is that large seasonal factors during winter months artificially boosted very modest actual gains in sales. Housing related statistics are notoriously unreliable during winter months. Based on this latter view, look for sales to head back down in January. The Administration’s tax incentives for boosting home sales are likely to help but that is a few months down the road as homebuyers are just now starting to mull their impact on the decision to buy while still worrying about tighter credit and possible job loss.
Existing home sales Consensus Forecast for January 09: 4.80 million-unit rate
Range: 4.55 to 4.91 million-unit rate
Durable goods orders in December pointed to a worsening manufacturing sector, dropping another 3.0 percent (revised), following a 4.0 percent decrease in November. Excluding the transportation component, new orders decreased 3.9 percent (revised), after falling 2.0 percent the prior month. Looking ahead, demand just is not there to boost orders. Retail spending is down, including for autos. Housing is keeping household durables spending and orders down. And even exports have turned down.
New orders for durable goods Consensus Forecast for January 09: -2.5 percent
Range: -7.8 percent to -0.8 percent
New orders for durable goods, ex-trans., Consensus Forecast for January 09: -2.1 percent
Range: -4.7 percent to 0.0 percent
Initial jobless claims continue to show a very depressed labor market. Initial claims were unchanged for the February 14 week at 627,000 but this level was 42,000 higher than a month earlier. Continuing claims are likewise pointing to trouble for February. They continue to push out to new records and indicate that jobseekers are now out of work for a longer period of time. Continuing claims, the latest data for the February 7 week, rose 170,000 to 4.987 million. Based on the negative news coming from the corporate sector, more layoffs are ahead.
Jobless Claims Consensus Forecast for 2/21/09: 625,000
Range: 599,000 to 671,000
New home sales continued to spiral downward in December, plunging 14.7 percent in December to a record low 331,000 annual unit rate from a 388,000 annualized pace in November. Supply on the market stood at a record high of 12.9 months vs. 12.5 months in November. And supply continued to weigh on prices as the median price for a new home plunged 6.0 percent from November to $206,500 and was down 9.3 percent from a year ago. While we may get a boost in coming months from newly enacted tax incentives, what is weighing on potential homebuyers now are tighter credit standards and rising unemployment.
New home sales Consensus Forecast for January 09: 330 thousand-unit annual rate
Range: 300 thousand to 350 thousand-unit annual rate
The initial estimate for fourth quarter GDP showed the recession is worsening with a sizeable 3.8 percent decline, following a 0.5 percent contraction the prior quarter. The economic decline was spread throughout the economy. The all important consumer spending component dropped 3.5 percent annualized. We also saw sharp declines in residential investment and business investment in equipment & software. Nonresidential structures investment dipped slightly and even exports declined. We likely will see a downward revision to the fourth quarter. But pay specific attention to final sales—which indicate how strong demand is. Markets did not pay much attention to it, but final sales fell an annualized 5.1 percent in the fourth quarter. How this figure winds up will play a key role in how first quarter growth ends up.
Real GDP Consensus Forecast for preliminary Q4 08: -5.4 percent annual rate
Range: -6.1 to -3.8 percent annual rate
GDP price index Consensus Forecast for preliminary Q4 08: -0.1 percent annual rate
Range: -0.4 to 0.0 percent annual rate
The NAPM-Chicago purchasing managers' index fell nearly 2 points in January to 33.3. The production index was especially weak while the employment index showed the largest drop of any index. Looking ahead, the new orders index was not encouraging with a dip to 30.7 from 31.5 in December. The January reading was deep in negative territory – far below the breakeven point of 50.
NAPM-Chicago Consensus Forecast for February 09: 33.0
Range: 28.8 to 36.0
The Reuter's/University of Michigan's Consumer sentiment index continued to show the consumer sector in a glum mood. The Reuters/University of Michigan consumer sentiment index dropped 5 points at mid-February to 56.2 from January's 61.2. February’s figure was barely above the record low of 51.7 set May 1980. Continued boosts in jobless claims, additional stock market losses, and now a bump up in gasoline prices are likely to keep sentiment close to record lows for some time.
Consumer sentiment Consensus Forecast for final February 09: 56.0
Range: 52.0 to 57.0
Econoday Senior Writer Mark Pender contributed to this article.
|
![[Econoday]](images/econoday_logo_slim.gif){kind=logo}
![[Econoday]](images/logo.gif){kind=logo}
