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Dark Clouds Loom Over Resurgent Economy

(RTTNews) – Fiscal crisis, fears that there may be more skeletons in the cupboard of financial firms and concerns that premature tightening by central banks may stifle growth are preoccupying the minds of traders even as growth data points encourage. The upward economic growth momentum set in motion by benevolent monetary and fiscal policy measures seems to be strengthening domestically and also in other countries. However, one cannot deny the fact that negative factors are in the play as well.

The debt crisis in some European nations poses threat to the European bond market. Additionally, as the European nations attempt to reign in their bloated deficits through adoption of tighter fiscal policies, growth in the region may take a hit. A setback to the European economies does not bode well for China for which Europe is the biggest export market. China with its ravenous appetite for resources and other goods has been driving growth in most other countries, and cooling off of growth in China could upset the global growth applecart.

The first read of first quarter U.S. GDP released by the Bureau of Economic Analysis last week showed that the U.S. economy rose at a slightly less-than-anticipated rate, with the GDP rising by 3.2% compared to the 3.3% growth expected by economists. Personal spending rose by 3.6%, adding 2.6 percentage points to GDP. Real final sales, which exclude inventories, rose 1.6% and have been higher for the fourth straight quarter. Buoyed by a 13.4% increase in spending in equipment and software, private investment rose 14.8%. On the other hand, residential spending declined by 10.9% and government spending was down by 1.8%. At the same time, net trade deducted six-tenths of a percentage points from growth due to an 8.9% surge in imports.

Meanwhile, the results of the Institute for Supply Management-Chicago manufacturing survey showed that the manufacturing purchasing managers’ index, reflecting conditions in the Mid-western region, rose to 63.8 in April from 58.8 in March. The index has now climbed to its highest level since April 2005. Economists had expected a more modest improvement to 60. The new orders index rose by 3.4 points to 65.2 and the order backlogs index climbed by 7 points to 61.4. On a more optimistic note, the employment index rose 4 points to 57.2. However, the inventories index declined 2.3 points to 52.4.

The Reuters/University of Michigan’s consumer sentiment survey showed that its headline consumer sentiment index was upwardly revised to 72.2 in April from the preliminary reading of 69.5. However, the reading was below the previous month’s 73.6. The expectations index rose to 66.5 from 62.3, while the current conditions index increased 0.3 points to 81.

The Conference Board’s consumer confidence index also rose more than expected to 57.9 in April from 52.3 in March, marking the highest reading since September 2008. The present situation index increased for the second straight month, rising to 28.6 from 25.2, and the expectations index jumped 7 points to 77.4.

The housing market outlook is still hazy, as reflected by the S&P Case-Shiller house price survey, which showed that house prices fell 0.1% in February compared to the previous month, marking the first drop since last May. On the other hand, annually, house prices rose 0.1%, although it was the smallest gain since house prices started increasing eight months ago.

As expected, the Federal Open Market Committee announced following the end of its 2-day meeting last week that it is maintaining the target for the federal funds rate unchanged at 0%-0.25%. In its commentary on growth, the central bank said the labor market is beginning to improve compared to its earlier view that the labor market is stabilizing. The Fed retained its assessment of economic activity, suggesting that economic activity has continued to strengthen.

The Fed said growth in household spending has picked up recently, almost the same view that it held last month, when it said household spending is expanding at a moderate rate. The statement indicating that housing starts have been flat at a depressed level was left out. The Fed’s commentary on inflation was retained, with the central bank expecting inflation to remain subdued for some time due to substantial resource slack.

As has been the case in the past two meetings, Kansas City Federal Reserve president Thomas Hoenig dissented on the pretext that the Fed’s language conveying its intention to retain interest rates at exceptionally low level levels does not give the central bank flexibility to begin raising rates modestly. The central bank also noted that all special liquidity facilities to augment liquidity, with the exception of the Term Asset-Backed Securities Loan Facility, have expired, with the TASLF set to expire on June 30th for loans backed by new-issue commercial mortgage-backed securities.

The job market is back under the scanner in the unfolding week, as the markets turn their focus to the Labor Department’s monthly non-farm payrolls report and the ADP’s private sector employment report. The results of the Institute for Supply Management’s manufacturing and non-manufacturing surveys and the weekly jobless claims report are among the other key releases that could move the markets.

The Commerce Department’s construction spending report, the personal income and outlays report for March, the National Association of Realtors’ pending home sales index for February, the preliminary first quarter productivity & costs report and the Federal Reserve’s consumer credit report round up the other economic data releases of the week.

Traders may also stay focused on the Fed speeches scheduled for the week, including a speech by Federal Reserve Chairman Ben Bernanke, due on Thursday. The announcements concerning the Treasury auctions of 3-year notes, 10-year notes and 30-year bonds may also be of interest to market participants.

The U.S. economy is set to add to payrolls yet again in April, helped in part by census-related hiring. That said, the report is likely to show a moderate underlying job recovery. MF Global Markets expects upward revisions to prior two months as well. At the same time, the unemployment rate is likely to remain unchanged.

Going by the results of the regional manufacturing surveys, the ISM’s national survey is expected to show improvement in the manufacturing sector. New order growth continues to be encouraging, supporting the manufacturing-led rebound in the economy. BMO Capital Markets expects the employment index to rise above ’50′ for the first time since December 2007.

Meanwhile, the non-manufacturing index is also expected to show an uptick, going by the strength in retail sales in recent months and the improvement in housing data in March, as buyers rushed to take advantage of the first time homebuyers’ credit, which expired on April 30th.

Monday

Individual automakers are scheduled to release their monthly U.S. sales results for April. The data will reveal the unit sales of domestically produced cars and light duty trucks, including sports utility vehicles and mini-vans, during the month.

The Bureau of Economic Analysis is due to release its personal income & outlays report for April. Economists estimate the report, which is due out at 8:30 AM ET, to show that personal income rose 0.3% and personal spending climbed 0.6% in the month.

Personal income remained unchanged in February compared to the previous month, while economists had estimated a 0.1% increase. Compensation edged up 0.1% and supplements to wages and salaries rose 0.2%. While proprietor’s income edged down 0.6%, while rental income fell 0.8%.

At the same time, personal spending grew 0.3%, in line with expectations, with spending on goods as well as services rising 0.3%. Spending on non-durable goods rose 0.7%, helping to offset the 0.4% decline in spending on durable goods.

At the same time, personal spending rose by 0.5% in January after rising by an upwardly revised 0.3% in the previous month. The increase exceeded economist estimates for 0.4% growth.

The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET. Economists expect the index to show a reading of 60 for April.

The manufacturing index rose to 59.6 in March from 56.5 in February, with seventeen of the eighteen industries surveyed reporting growth. Economists had expected a more modest improvement to 57. While the new orders index rose 2 points to 61.5, the backlog orders index climbed 3 points to 58. Reflecting buoyancy on the exports front, the export orders index surged up 5 points to 61.5. However, the employment index eased 1 point to 55.1.

The Commerce Department’s construction spending report to be released at 10 AM ET is expected to show a 0.3% decline in spending for March.

The construction spending report for February showed a 1.3% monthly decline compared to expectations of a 1% decline. To make matters worse, the previous two months’ data were downwardly revised. Private residential construction spending declined 2.1% compared to a 0.4% decline in non-residential construction spending. Meanwhile, public construction spending fell by 1.7%.

Tuesday

The Commerce Department is due to release its report on factory goods orders for March at 10 AM ET. Orders for manufactured goods are likely to have declined 0.2% in the month.

Last week, the Commerce Department said released durable goods orders for March, showing a 1.3% decrease in orders for goods designed to last more than 3 years and account for the bulk of factory goods orders. The weakness was mainly due to softness in transportation orders, which fell 12.9%. Most categories showed strength. In February, factory goods orders had climbed 0.6% following a 2.5% increase in January.

Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. The index is expected to show an increase of 5% for March.

Wednesday

The ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 AM ET. The report is usually released two days prior to the Labor Department’s employment report. The private sector is expected to have added 30,000 jobs in April.

The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM. The non-manufacturing index is likely to show a reading of 56.1 for April.

Conditions in the non-manufacturing sector improved at a faster rate in March. Fourteen of the eighteen sectors surveyed reported growth. The non-manufacturing index rose about 2.4 points to 55.4 in March, while economists had expected a more modest improvement to 54.

Among the sub-indexes, the business activity index rose 5.2 points to 60 and the new orders index gained 7.3 points to 62.3. The order backlog index climbed about 10 points. Despite rising by 1.2 points, the employment index remained slightly below the ’50′ cut off mark.

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

In the week ended April 23rd, crude oil stockpiles increased by 1.9 million barrels to 357.8 million barrels. Crude oil inventories remained above the upper limit of the average range.

Distillate inventories rose by 2.9 million barrels, remaining above the upper boundary of the average range. However, gasoline stockpiles fell by 1.2 million barrels, but they remained above the upper limit of the average range. Refinery capacity utilization averaged 86.2% over the four weeks ended April 23rd compared to 84.7% in the previous week.

Boston Federal Reserve Bank President Eric Rosengren is due to speak to the Money Marketeers of New York University at 7 PM ET.

Thursday

The Labor Department is due to release its customary jobless claims report for the week ended May 1st at 8:30 AM ET. Economists expect a decline in claims to 440,000.

First time claims for unemployment benefits saw a modest decrease in the week ended April 24th, with the drop in initial jobless claims coming in roughly in line with economist estimates.

Jobless claims fell to 448,000 from the previous week’s revised figure of 459,000. Economists had been expecting jobless claims to slip to 445,000 from the 456,000 originally reported for the previous week.

Federal Reserve Chairman Ben Bernanke is scheduled to speak to the Chicago Federal Reserve Bank 46th Annual Conference on Bank Structure at 9:30 AM ET.

The U.S. Labor Department is also scheduled to release its preliminary report on first quarter non-farm productivity and unit labor costs at 8:30 AM. Economists expect productivity growth of 2.4% for the quarter.

In the fourth quarter, non-farm productivity rose at a 6.9% sequential rate, upwardly revised from the 6.2% growth estimated earlier. Economists had expected the reading to be revised up to 6.5%.

The productivity growth was helped by a 7.6% increase in output, but partly offset by the 0.6% increase in hours worked. Meanwhile, unit labor costs fell at a downwardly revised rate of 5.9%.

Friday

The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM. The report sheds light on the number of paid employees working part time or full time in the nation’s business and government establishments, the number of hours worked in the non-farm sector, the basic hourly rate for major industries and the number of unemployed as a percentage of the labor force. Economists estimate that the U.S. economy added 187,000 jobs in April and expect the unemployment rate to remain unchanged at 9.7%.

The U.S. economy added 162,000 jobs in March, the biggest job gains since March 2007, following an upwardly revised decline of 14,000 in payrolls in February. The private sector added 123,000 jobs, the most since May 2007. Manufacturing payrolls increased by 17,000, rising for the third straight month, while construction jobs rose by 15,000.

The federal government added 48,000 temporary workers for the decennial census, significantly lower than what had been estimated. The average workweek in the private sector increased by 0.1 hours to 34 hours, but the average hourly earnings edged down by 0.1% month-over-month to $22.47. Annually, the measure was up 1.8%. Meanwhile, the household survey showed that the jobless rate held steady at 9.7% for the third straight month.

Philadelphia Federal Reserve Bank President Charles Plosser is due to address the Delaware State Chamber of Commerce Economic Outlook luncheon in Wilmington at 11:30 AM ET.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET. Consumer credit for March is likely to show a decline of $3.9 billion.

Consumer credit declined by $11.5 billion in February following a $10.6 billion increase in January. Economists had expected a more modest $0.5 billion drop. Revolving credit tied to credit cards plunged by $9.4 billion, while non-revolving credit tied to auto loans fell $2.1 billion.

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