» » Muted Expectations Accentuates Strength Relayed By Positive Data

Muted Expectations Accentuates Strength Relayed By Positive Data

(RTTNews) – The equity markets have been running up nicely despite fiscal crisis posing a threat to some nations and the fundamental economic picture remaining still cloudy. The positive reaction stems from the fact that expectations are muted, and so even the slightest of the upside surprise is seen as a buying opportunity by traders.

The simmering Greek crisis has been a pain in the neck of the markets, as the developments on the front sway the market in one or the other direction. Last week, Greek Prime Minister George Papandreou had asked for activation of the EU/IMF loan package after the debt markets in Greeks deteriorated throughout the week. Incidentally, fiscal imbalances and crises have become sporadic, and are also threatening other European nations such as Portugal, Ireland, Italy and Spain.

However, the U.S., with its staggering fiscal deficit does not face as much of a risk as the European nations. Sherry Cooper from BMO Capital Markets argues that the U.S. faces a far less intractable problem than some EU member nations due to a wide array of options to address the fiscal imbalance. The economist believes that the U.S. fiscal deficit is manageable due to the salubrious impact of a weak dollar on export growth and low borrowing costs. It is also believed that the U.S. government will initiate measures on a war footing to take the deficit demon by the horn, with the raising of taxes and slashing of government spending seen as some feasible and possible options.

Meanwhile, the recovery in the U.S. is now becoming broad based, with the healthy gains seen in consumer spending and business investment expected to lift domestic demand, which is seen as a precursor for a sustainable recovery. According to Danske Bank, the coming months are likely to be a sweet spot in terms of the macro situation, with both employment growth and production surprising on the upside.

As expected, housing reports released during the past week were positive. According to a report released by the National Association of Realtors, existing home sales rose to a seasonally adjusted annual rate of 5.35 million units in March from 5.01 million units in February, snapping a three-month losing streak. First time buyers accounted for about 44% of the total buyers, strong evidence of the success of the first time homebuyers’ credit, which is due to expire at the end of April.

Inventories of existing homes in terms of the months of supply slid to 8 in March from 8.5 in the previous month. However, in absolute numbers, existing home inventories rose to 3.58 million from the previous month’s 3.53 million. The median price of an existing home rose 3.7% month-over-month.

New home sales rose by 26.9% month-over-month in March to an 8-month high of 411,000, with the increase marking the biggest ever jump. Inventories of new homes fell 2.1%, the first decline since December, while in terms of months of supply inventories fell to 6.7 from 8.7 in the previous month. The median selling price of a new home rose 4.3% year-over-year.

However, the Federal Housing Finance Agency’s survey did not confirm the optimism in the housing sector, with the agency’s house price index edging down 0.2% in February. Compared to the same month last year, prices declined 3.4%.

Notwithstanding the drop in the headline number, the details of the durable goods orders report was encouraging. Excluding transportation orders, orders rose 2.8% month-over-month in March. Non-defense capital goods orders, excluding aircrafts rose by 4% month-over-month, signaling a pick up in business investment.

Continuing the string of positive readings, the Conference Board said its leading economic index rose 1.4% month-over-month in March following a 0.4% increase in February, with the leading economic index now at a record high. The coincident index rose 0.1% in March on top of a 0.1% increase in the previous month, while the lagging economic index rose 0.2%. The improvement in the leading economic index has come on the back of improvements in financial and labor market indicators.

Meanwhile, jobless claims declined to 456,000 in the week ended April 16th from 480,000 in the previous week. However, the four-week moving average increased to 460,000 from 458,000. The number of people receiving extended benefits and those receiving emergency unemployment compensation fell sharply.

Last week, the Labor Department said producer prices rose 0.7% month-over-month in March compared to expectations for a 0.5% increase. Core prices rose by 0.1%, in line with expectations. Food prices and energy prices, which together make up about 40% of the producer price index, rose by 2.4% and 0.7%, respectively. The annual rate of the headline producer price index was 6% in March compared to 4.4% in February, but the annual rate of core producer price inflation edged down one-tenth of a percentage point to 0.9%. The tame trend seen in core producer prices points towards benign core consumer price inflation in the near to medium term.

The Federal Open Market Committee meeting, consumer confidence readings, the first read of first quarter GDP and a housing report are likely to headline the economic events of the unfolding week. Apart from that traders may also stay focused on the weekly jobless claims report, the results of the ISM-Chicago’s manufacturing survey and the results of the Treasury auctions of 2-year, 5-year and 7-year notes.

The FOMC meeting is unlikely to produce any surprise, with economists expecting the Fed’s policy setting arm to maintain interest rates unchanged at near zero levels. The central bank is likely to be guided by the core inflation rate, which is continuing to remain below its target, and the staggering level of the unemployment rate. The phrase outlining the Fed’s resolve to keep interest rates at exceptionally low levels is likely to be retained.

The Conference Board’s consumer confidence index is likely to remain flat or rise slightly, as labor market conditions haven’t improved significantly. Although retrenchments have reduced, the hiring environment is still weak. That said, equity market conditions remained supportive.

Surprisingly resilient consumer spending is likely to have supported first quarter GDP growth, with the U.S. economy expected to have slowed only moderately from the above-trend 5.6% growth in the fourth quarter of 2009. BMO Capital Markets expects exports, business inventories and spending to show solid gains, while residential construction and business capital spending are likely to show modest increases. However, contribution by the inventory cycle could show a reduction.

Monday

There are no significant economic reports due out on Monday.

Tuesday

The Federal Reserve Open Market Committee is scheduled to meet on Tuesday and make an announcement regarding its near-term direction of monetary policy at 2:15 PM ET the next day. The Federal Open Market Committee consists of seven Governors of the Federal Reserve Board and five Federal Reserve Bank Presidents.

As expected at the Federal Open Market Committee meeting, the Fed opted to retain interest rates unchanged at 0-0.25%. In its commentary, the Fed continued to view the economic activity as continuing to strengthen, while the labor market outlook was upgraded, with the central bank suggesting that the labor market is stabilizing as opposed to its earlier view that the deterioration in the labor market was abating. The Fed noted that business spending on equipment and software has risen significantly, while spending on non-residential structures is termed as declining. The Fed also made a mention of flat to depressed housing starts.

As in the previous meeting, Kansas Federal Reserve Bank President Thomas Hoenig dissented on the grounds that he believed that that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

The S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S., is scheduled to be released at 9 AM. Economists expect a 1.1% year-over-year increase in the 20-city composite house price index for February.

The Conference Board is scheduled to release its consumer confidence report for April at about 10 am ET. The report, which is based on a survey of 5,000 U.S. households, is expected to show that the consumer confidence index rose to 53.7 in April.

In March, the consumer confidence index rose 6.1 points to 52.5 from 46.4 in February. In February, the index had fallen by 10 points. While the present situations index rose 4.3 points to 21.7, the expectations index climbed 7.3 points to 70.2.

Wednesday

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended April 23rd at 10:30 AM ET.

Crude oil inventories rose by 1.9 million barrels to 355.9 million barrels in the week ended April 16th. Inventories remained above the upper limit of the average range for this time of the year.

Gasoline inventories rose by 3.6 million barrels, remaining above the upper limit of the average range. Distillate fuel stockpiles also increased, rising by 2.1 million barrels. Inventories of distillate fuel were above the upper boundary of the average range. Refinery activity averaged 84.7% over the four-weeks ended April 16th compared to 83.4% in the previous week.

Thursday

The Labor Department is due to release its customary jobless claims report for the week ended April 24th at 8:30 AM ET. Economists estimate a decline in jobless claims to 440,000.

In the week ended April 17th, jobless claims fell to 456,000 from the previous week’s revised figure of 480,000. Economists had been expecting jobless claims to fall to 450,000 from the 484,000 originally reported for the previous week.

Friday

The Bureau of Economic Analysis is due to release its advance estimate of first quarter GDP report at 8:30 AM ET. The report is likely to show that the U.S. economy expanded at a 3.2% rate in the quarter.

In the fourth quarter, GDP increased by 5.6% quarter-over-quarter, with the acceleration in GDP growth in the fourth quarter relative to the third quarter due to an acceleration in private inventory investment, an upturn in nonresidential fixed investment, an acceleration in exports, and a deceleration in imports that were partly offset by decelerations in personal consumption expenditure and in federal government spending.

The Labor Department is scheduled to release its report on the employment cost index for the first quarter at 8:30 AM ET. Economists expect a 0.5% in the index for the first quarter.

In the fourth quarter, the employment cost index rose 0.5% sequentially. The consensus estimates had called for a more modest 0.4% increase. Wages and salaries as well as benefits rose at a 0.5% rate.

The results of the Institute of Supply Management-Chicago’s business survey for April are scheduled to be released at 9:45 AM ET. Economists expect the business barometer index based on the survey to come in at 59.8.

The ISM-Chicago’s regional manufacturing index fell 3.8 points to 58.8 in March. Economists had expected a more modest drop to 60. The new orders index declined to 61.8 in March from 62.2 in the previous month and the index of order backlogs fell 4.2 points to 54.3. At the same time, the employment index rose 0.1 points to 53.1.

The Reuters/University of Michigan’s final report on the consumer sentiment index for April is scheduled to be released at 9:55 AM ET. The consumer sentiment index is expected to be revised up to 71.5 from the mid-month of reading of 69.5.

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