|
Just a few weeks ago, the green shoots view of the economy was taking hold in full force. And it appeared to continue at the start of this past week. But a very negative housing starts report on Tuesday and a daily drip of not-so-positive news the rest of the week caused equities to rethink some of the optimism.
 It looked like it was going to be a great week as equities closed the first day up sharply. But indexes fell the next four days, leaving most stocks with barely a modest gain for the week. However, equities indeed looked red hot on Monday, spurred by a number of factors, the first of which was a massive rally in Indian markets after the decisive defeat of communist candidates. Economic news for the day was positive as the National Association of Homebuilders reported a second consecutive gain in the Housing Market Index. A separate report also found housing affordability at its highest in almost 20 years. Company news was good with Lowe’s projecting higher second quarter profits and Bank of American getting an upgrade from Goldman Sachs.
But it was downhill the rest of the week. Housing starts unexpected fell sharply in a report on Tuesday. On Wednesday, the Fed released its quarterly economic forecast with downgrades in GDP growth. Continuing jobless claims hit another historical high on Thursday. But the big mover on the downside on Thursday was a warning by Standard & Poor’s that the U.K.’s credit rating was at risk of being downgraded due to rapidly growing government deficits. This rattled bond and equity markets not just in the U.K. but in many countries, including the U.S. With no economic news at week end and a Memorial Day weekend coming up, trading was thin. Net for the week, equities were little changed but at least still positive.
Equities were up this past week. The Dow was up 0.1 percent; the S&P 500, up 0.5 percent; the Nasdaq, up 0.7 percent; and the Russell 2000, up 0.4 percent.
For the year-to-date, major indexes are mixed as follows: the Dow, down 5.7 percent; the S&P 500, down 1.8 percent; the Nasdaq, up 7.3 percent; and the Russell 2000, down 4.4 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Yields on Treasuries ended up this past week—especially on the long end. Rates were bumped up moderately at the start of the week as funds flowed into equities on the spike in stock prices. But yields actually were nudged back down at mid-week with the release of the minutes of the April 28-29 FOMC meeting which included the Fed’s downgraded forecast for economic growth.
The big movement for the week was on Thursday after Standard Poor’s indicated that the UK’s AAA rating was at risk due to the government’s balooning deficit—which was seen as possibly reaching 100 percent of GDP. However, no change to the rating was made for now. But the comments led markets to worry about ratings for other countries—including the U.S.—with rapidly growing debt. Yields on the 10-year and 30-year T-bonds rose for the day by 18 and 19 basis points, respectively.
 Yields continued to rise further on Friday over the same concerns from Standard & Poor’s comments the day before. Also, the Treasury had just announced auction in the coming week for a cumulative $101 billion in 2-year, 5-year, and 7-year notes. Traders were nervous about taking long positions heading into a long, holiday weekend with such heavy supply coming up. Long rates ended the week net up significantly and by as much as 30 basis points.
For this past week Treasury rates were up as follows: 3-month T-bill, up 1 basis point; the 2-year note, up 4 basis points; the 5-year note, up 20 basis points; the 10-year bond, up 32 basis points; and the 30-year bond, up 30 basis points.
 Oil prices jumped sharply this past week to levels not seen in over six months. The spot price for West Texas Intermediate got a big boost on Monday as oil followed equities up. During the week, hedge fund managers were shifting toward holding more oil commodities as an inflation hedge. Also throughout the week, a declining dollar put upward pressure on oil prices.
Net for the week, spot prices for West Texas Intermediate rose $4.68 per barrel to settle at $61.02 – the highest price since November 10, 2008 at $62.41 per barrel.
Data on the economy were mixed this past week. Housing construction continues to deteriorate significantly but manufacturing numbers continue to suggest that this sector is contracting at a slower pace. The index of leading indicators turned positive for the first time in months but the improvement may be short-lived. In the meantime, the latest Fed minutes indicates that FOMC participants believe that the process of reaching recovery is underway, although it still will likely take at least the rest of the year to get out of recession.
 Although financial markets reacted negatively to the latest housing report, there was a little good news hidden in the details. But clearly at face value, the April housing starts report was gloomy. Housing starts fell sharply to a new record low for a series going back to 1959, largely on cutbacks in multifamily construction. Starts dropped another 12.8 percent, following an 8.5 percent decline in March. The April pace of 0.458 million units annualized was down 54.2 percent year-on-year.
 The good news in the report was that the single-family component may have stabilized. While April’s decrease in overall starts was led by a 46.1 percent plunge in multifamily starts, single-family starts actually rose 2.8 percent after edging up 0.3 percent in March.
The recent downtrend in multifamily starts is likely due to several reasons. Banks have raised lending standards—including for apartment and condo projects. Less credit is available as banks are trying to shore up capital. And household formation has slowed as the recession has kept more young adults in their parents’ house. This has kept apartment demand soft.
On a year-ago basis, single-family starts were down 45.6 percent in April while multifamily starts were down 72.3 percent.
Permits also declined at the national level, falling 3.3 percent in April, after dropping 7.1 percent the month before. The April permit pace of 0.494 million units annualized was down 50.2 percent on a year-ago basis. For the latest month, single-family permits rebounded 3.6 percent while multifamily permits dropped 19.9 percent.
 Earlier, the New York Fed’s manufacturing index came in significantly less negative and this week the improvement trend continued, albeit not as strongly. The Philadelphia Fed's business activity index edged up to minus 22.6 in May from minus 24.4 the month before. The May reading was the best since plus 1.9 seen for September 2008. Yes, manufacturing in the mid-Atlantic region is still contracting but not at as rapid a pace as earlier in the year. However, the new orders index actually fell back slightly to minus 25.9 from minus 24.3 in April. While the new orders index indicates that overall activity likely will shrink in the very near term, the six months out indexes suggests that manufacturing in the mid-Atlantic may be recovering not be too far down the road. The six months out index for general business activity rose sharply to 47.5 from 36.2 in April.
 The index of leading economic indicators in April posted its first gain in seven months. The leading index jumped a resounding 1.0 percent in April, suggesting that the recession is easing.
The most important factors giving April a boost were the big stock market rally and the rise in consumer expectations. The biggest negative, money supply, has been the biggest positive in recent reports. Building permits were a big negative.
The coincident indicator, which gives a reading on current overall conditions, strongly suggests that the rate of contraction in the second quarter has eased. This index fell only 0.2 in April, compared to declining 0.6 percent the prior two months.
Looking ahead, however, the improvement in the leading index is uncertain. As of this past week, the Dow was near its end of April level, showing nowhere near the strength of April’s gain. Consumer expectations may dampen if unemployment continues to rise as is likely. On the other hand, the positive contribution in April from the interest rate spread actually came from a rise in the 10-year Treasury bond and not from a drop in the fed funds rate. That was a reversal of flight to safety to a large degree and due to concern over looming supply to fund federal deficits. In fact, it looks like the spread will be a positive contribution in May based on a notable rise this month in the yield on the 10-year T-bond. Of course, this type of steepening in the yield curve is a negative for the economy rather than a positive when it is assumed that the steepening is due to a lower fed funds rate.
But the bottom line for the index of leading indicators is that it is likely to continue to point to an easing in the recession though not an outright recovery for a while.
There was good news and bad news in the latest minutes of the Fed policy-making committee. The good news was that the minutes for the April 28-29 FOMC meeting painted a picture of FOMC participants seeing a diminishing of downside risks to the economy. The bad news was that the Fed's economic forecasts were downgraded nonetheless.
The Fed's forecast for GDP growth in 2009 (Q4/Q4) was lowered substantially and to a lesser degree for 2010 and 2011. Meanwhile, the unemployment rate was revised up sharply for all three years. Headline PCE inflation was bumped up slightly for 2010 and 2011. The core inflation projection for 2009 was raised, likely due to higher-than-expected actual growth thus far for this year.
Even though the GDP forecasts for 2009, 2010, and 2011 were downgraded, FOMC participants indicated that the recession would be easing during the second quarter and remainder of 2009.
"However, participants also saw recent indications that the economic downturn was slowing in the second quarter, and they continued to expect that sales and production would begin to recover-albeit gradually-during the second half of the year, reflecting the effects of monetary and fiscal stimulus and of measures to support credit markets and stabilize the financial system along with market forces. In particular, participants noted some improvement in financial conditions in recent months, signs that consumer spending was leveling out, and tentative indications that activity in the housing sector might be nearing its bottom."
The Fed governors and District Bank president, however, see a slow recovery initially.
"Participants generally expected that strains in credit markets and in the banking system would ebb slowly, and hence that the pace of recovery would continue to be damped in 2010. But they anticipated that the upturn would strengthen in 2011 to a pace exceeding the growth rate of potential GDP as financial conditions continue to improve, and that it would remain above that rate long enough to eliminate slack in resource utilization over time."
Some indicated that they had concern that the rapid growth in the monetary base this year will result in a more pronounced recovery and quicker convergence with long-run equilibrium growth. In plain English, some FOMC participants are worrying that current rapid growth in money supply will cause the economy to overheat sooner than many expect. Although not stated in the minutes, you can bet those comments came from a few District Bank presidents.
Although the FOMC voted to retain the planned amount of balance sheet expansion adopted at the previous meeting, some members noted that an increase in the total amount of securities purchases might be warranted to speed up the recovery. All agreed to wait and monitor incoming data before deciding to boost planned expansion of the Fed's balance sheet.
The bottom line is that the Fed believes monetary and fiscal policies are on track to result in recovery starting by early 2010. However, FOMC members see a sluggish recovery due to still tight credit conditions, high unemployment, and weak house prices.
The news has not been as negative as just a few months ago. But recession continues—just not at as rapid a pace. Still, signs of actual positive growth are not yet here. Recovery still likely will start no sooner than the end of the year.
This coming week, the two major market movers are durables orders on Wednesday and first revisions to first quarter GDP on Friday. But you can count on traders paying close attention to both existing and new home sales numbers, out on Wednesday and Friday, respectively.
U.S. Holiday: Memorial Day
All Markets Closed
The Conference Board's consumer confidence index moved up from near historic lows in April to 39.2 from 26.9 in March. The biggest improvement was in the expectations component which jumped nearly 20 points to 49.5, suggesting that consumers see better times ahead. But with labor markets worsening—notably for continuing jobless claims and higher unemployment—this optimism may not last.
Consumer confidence Consensus Forecast for May 09: 43.0
Range: 40.0 to 48.0
Existing home sales continued their downward spiral in March, falling 3.0 percent to an annualized sales rate of 4.57 million units. Supply was little changed but still quite heavy at 9.8 months versus 9.7 months in February. But there mixed signs of potential improvement in sales. The pending sales index rose 3.2 percent in March and pending home sales numbers typically impact closings (as seen in existing home sales) one or two months later. However, MBA purchase applications were down in April.
Existing home sales Consensus Forecast for April 09: 4.67 million-unit rate
Range: 4.50 to 4.75 million-unit rate
Durable goods orders in March fell back 0.8 percent after a 1.6 percent rebound in February. Excluding the transportation component, new orders decreased 0.7 percent in March, after advancing 1.4 percent the prior month. Looking ahead, durables orders may continue to decline in April, based on more recent manufacturing surveys. The ISM, Philly Fed, and New York Fed manufacturing surveys for April all showed new orders indexes in negative territory.
New orders for durable goods Consensus Forecast for April 09: 0.0 percent
Range: -2.0 percent to +2.1 percent
Initial jobless claims remain very elevated as they fell on 12,000 in the May 16 week to 631,000. But the news has been quite grim for those already in the unemployment line. Continuing claims surged 75,000 to 6.662 million in the May 9 week—another record high for continuing claims.
Jobless Claims Consensus Forecast for 5/23/09: 635,000
Range: 620,000 to 640,000
New home sales fell 0.6 percent in March to an annualized unit sales rate of 356,000. Sales were down 38.0 percent on a year-ago basis. The modest goods news in the report was that supply on the market eased to 10.7 months from 11.2 months in February and 12.5 in January. But the improvement in supply may see some setback from increased foreclosures. Nonetheless, we may see a rise in sales for April if homebuilders are correct. The National Association of Homebuilder/Wells Fargo Housing Market Index jumped 5 points in April. The current sales conditions and traffic components were up notably for April.
New home sales Consensus Forecast for April 09: 360 thousand-unit annual rate
Range: 350 thousand to 390 thousand-unit annual rate
GDP for the first quarter initial estimate came in with a sharp 6.1 percent annualized drop and followed a 6.3 percent contraction the prior quarter. A key fact from the report was that the first quarter decrease was led by a $103.7 billion cutback in inventories. Real final sales of domestic product fell only 3.4 percent while real final sales to domestic purchasers declined 5.1 percent annualized (purchases by U.S. residents of goods and services wherever produced). Markets likely will be watching to see whether weakness remains in reduced inventory investment. The cutback in inventories is seen as helping set up stronger growth in coming quarters.
Real GDP Consensus Forecast for preliminary Q1 09: -5.5 percent annual rate
Range: -6.4 to -5.1 percent annual rate
GDP price index Consensus Forecast for preliminary Q1 09: +2.9 percent annual rate
Range: +2.8 to +2.9 percent annual rate
The Chicago PMI Business Barometer in April jumped nearly 10 points to 40.1. While the latest reading was still sub-50 and indicating contraction, it at least showed that the rate of decline has eased. Looking ahead, we may see further but incremental improvement as April’s new orders index jumped more than 11 points to 42.1
Chicago PMI Consensus Forecast for May 09: 42.0
Range: 34.2 to 45.0
The Reuter's/University of Michigan's Consumer sentiment index improved slightly in mid-May, rising to 67.9 from 65.1 for late April. The improvement was centered in the expectations index which jumped nearly 6 points to 69.0. But higher unemployment could lead to some reversal in overall consumer sentiment.
Consumer sentiment Consensus Forecast for final May 09: 68.0
Range: 67.0 to 69.0
Econoday Senior Writer Mark Pender contributed to this article.
|
![[Econoday]](images/econoday_logo_slim.gif){kind=logo}
![[Econoday]](images/logo.gif){kind=logo}