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Recovery In Fits And Starts

(RTTNews) – After weeks of positive tidings on the economic front, which considerably built up expectations concerning a hassle-free steady recovery, traders were jolted out of their reverie last week by a rude awakening. The recovery that is currently underway cannot be taken for granted at any point in time, and this became obvious following the release of an anemic national employment report by the Labor Department last week. Add to this, the uncertainty surrounding the fiscal condition of some European nations- the scenario becomes perfect for triggering an exodus from all risky bets.

So, are we in for more uncertain times and nail biting wait before we can recline in our armchairs and comfortably look forward to a serene economic environment? Although many economists rule out the possibility of a double-dip recession, the global economy is in for an uneven rough ride, especially as some countries wean their economies away from fiscal stimuli that were benevolently bestowed upon in the immediate aftermath of the credit crisis that took the global economy by storm in 2008.

Asia is now serving as an engine of growth for the global economy, as the region’s ravenous appetite for goods and commodities is keeping machines humming in other developed nations. When growth in Asia, especially in China cools off, the real trouble begins. The situation looks all the more precarious, given skepticism regarding the quality of growth in China.

In March, the Chinese government said in a report that China will expand 8% annually in 2010 compared to an estimated 8.7% in 2009, although a truly commendable number considering the growth rates in most developed nations. Realizing the risks involved in artificially boosted growth, the Chinese government vouched to focus on the quality of growth, reducing its reliance on hefty investment and exports.

Domestically, the Labor Department said the U.S. non-farm payrolls expanded by a less-than-expected 431,000 in May, with census-related hiring adding 411,000 jobs. Much to the disappointment of many, private sector jobs rose by merely 41,000, a notable slowdown from 218,000 rate April. The bulk of the weakness was centered in the financial and construction sector.

The Institute for Supply Management’s manufacturing purchasing managers’ index fell by less than economists had expected, while also suggesting that the sector expanded for the 10th straight month. The index fell to 59.7 in May from 60.4 in April, while economists had expected a steeper decline to 59.4.

The new orders index remained unchanged at 65.7, while the order backlogs index rose 2 points to 59.5. On an upbeat note, the employment index increased by 1.3 points to 59.8, its highest level since May 2004.

Meanwhile, the institute’s non-manufacturing index remained unchanged at 55.4 in May, remaining at the highest level since May 2006. The employment index rose about 1 point to 50.4, moving above the 50 level for the first time since December 2007. On the other hand, the new orders index fell 1.1 points to 57.1, while the order backlogs index jumped 6.5 points to its highest level since August 2007. Despite falling 4 points, the price paid index remains elevated at 60.6.

The housing market continued to benefit from fiscal incentives. The National Association of Realtors’ pending home sales index for April rose 6% month-over-month compared to expectations for a 4.3% increase. The month’s gain is widely seen as the final leg-up in activity due to the homebuyer tax credit.

Separately, the Commerce Department said construction spending rose 2.7% month-over-month in April compared to expectations for only 0.1% growth. Public and private construction spending rose 2.9% and 2.4%, respectively. In the private sector, spending on single-family house construction surged up 3.4%, with the increase partly offset by a 1.9% drop in multi-family housing construction spending. Private non-residential construction spending climbed 1.7%.

Meanwhile, vehicle sales in the U.S. came in at a seasonally adjusted annual rate of 11.6 million units in May, up from 11.2 million units in April. General Motors reported a 17.5% year-over-year increase in sales in May and Ford (F) also reported a better than expected 21.9% jump in sales. On the other hand, Toyota (TM) posted a more modest 6.7% increase in sales, as it attempts to come to terms with the impact of recent recalls.

The Labor Department said the number of individuals claiming unemployment benefits fell to 453,000 in the week ended May 29th from 463,000 in the previous week. However, the four-week average edged up to 459,000 from the previous week’s 457,000. Continuing claims for the week ended May 22nd rose to 4.666 million from 4.625 million.

The Labor Department also downwardly revised first quarter non-farm productivity growth to 2.8% from the 3.6% estimated initially. The downward revision was due to a reduction to output, while the increase in hourly compensation was also downwardly revised to 1.5% from 1.9%. However, unit labor costs was upwardly to show a drop of 1.3% compared to the initially estimated 1.6% decline. Going forward, Barclays expects productivity to slow down further due to a further pick up in employment and hours worked rather than a deceleration in output growth.

The action on Main Street slows down in the unfolding week after the previous weeks data flurry. That said, there are other concerns that could keep traders pre-occupied. The Euro zone crisis is taking a nasty turn, as warnings from other countries in the region are accentuating contagion risk.

Hungary, which incidentally is not a euro zone member country, spread panic on Friday after local politicians made comments equating the nation’s fiscal problem to the one that is prevalent in Greece.

The Commerce Department’s retail sales report, the preliminary Reuters/University of Michigan’s consumer sentiment index and the weekly jobless claims report are among the first-tier economic reports scheduled to be released in the unfolding week. Traders may also pay attention to the Beige Book and the Fed speeches scheduled for the week, including a speech by Federal Reserve Chairman Ben Bernanke.

The Federal Reserve’s consumer credit report, the Commerce Department’s wholesale and business inventories reports for April, the U.S. trade balance report for April and the Treasury Budget for May round up the other events on Main Street this week. Traders may also evince interest in the results of the Treasury auctions of 3-year notes, 10-year notes and 30-year bonds.

The retail sales growth is likely to have slowed down in May, mainly due to a pullback in gasoline prices. Additionally, building materials sales should also see a retreat after decent gains in the previous two months. However, the declines could be offset by fairly robust chain store sales and auto sales.

BMO Capital Markets expects the Beige Book to showcase the ongoing improvement in the economy and some stabilization in credit standards. However, commerce construction may continue to show weakness, while inflation is likely to be termed as subdued in all regions. The firm expects the report to give an indication of how much home sales pulled back after the expiration of the tax credit in late April and whether exports to a struggling Europe are slowing.

The U.S. trade deficit is set to widen only slightly, as higher oil prices boost up imports and exports to regions outside of Europe remain solid. Going forward, IHS Global Insight expects import growth to outpace export growth in volume terms, as the swing in the U.S. inventory cycle sucks in imports and trade will serve as a drag on growth for the rest of the year.

Monday

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET. Consumer credit for April is likely to show a decline of $2 billion.

In March, consumer credit outstanding by a seasonally adjusted annual rate of $2 billion. Non-revolving credit tied to auto loans rose $5.2 billion, while revolving credit, mostly comprising credit card loans fell by $3.2 billion.

Tuesday

There are no important economic reports due to be released on Tuesday.

Wednesday

The Commerce Department is due to release its wholesale inventories report at 10 AM ET. Economists expect wholesale inventories at the end of April to show a 0.4% increase.

Wholesale inventories at the end of the March were up 0.4% compared to the previous month. Wholesale sales rose 2.4% month-over-month, with the inventories to sales ratio down to 1.13 from 1.39 in the previous year.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended June 5th at 10:30 AM ET.

Crude oil inventories fell by 1.9 million barrels to 363.2 million barrels in the week ended May 28th. Crude oil stockpiles were still above the upper limit the average range for this time of the year.

Gasoline inventories also fell, dropping by 2.6 million barrels, but were still above the upper limit of the average range. On the other hand, distillate inventories rose by 0.5 million barrels and were above the upper boundary of the average range. Refinery capacity utilization averaged 87.9% over the four-weeks ended May 28th compared to 88.4% in the previous week.

The Federal Reserve is due to release its Beige Book, which is a compilation of anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts, at 2 PM ET. The report is normally released about two weeks before the monetary policy meeting is held.

Federal Reserve Chairman Ben Bernanke is scheduled to make remarks at Richmond Federal Reserve Bank forum on employment trends in Richmond at 4 PM ET.

Thursday

The trade gap data for April is due out at 8:30 AM ET. Economists estimate that the trade gap widened to $41.2 billion in the month. The trade gap measures the difference between imports and exports of both tangible goods and services.

The trade deficit for March widened to $40.4 billion from the downwardly revised deficit of $39.4 billion for the previous month. Economists estimated a deficit of $40.5 billion, wider than the deficit of $39.7 billion estimated initially for February.

Imports rose by $5.6 billion to $188.3 billion, while exports increased by $4.6 billion to $147.9 billion. The goods deficit rose $1.8 billion, while the surplus on the trade in services declined by $0.8 billion.

The Labor Department is due to release its customary jobless claims report for the week ended June 6th at 8:30 AM ET. Economists expect a decline in claims to 450,000.

In the week ended May 29th, the number of people filing first-time unemployment claims edged down, though the figure came in slightly above what economists were predicting. Initial jobless claims fell 10,000 to 453,000 for the week. Economists had expected claims to be around 450,000. Continuing claims, a statistic that measures the number of people receiving ongoing unemployment help, edged up to 4.666 million.

The Treasury Budget, a monthly account of the surplus or deficit of the federal government is due to be released at 2 PM ET. The budget is considered as an indicator of budgetary trends and the thrust of fiscal policy. Economists estimate a deficit of $140 billion for May.

Friday

Philadelphia Federal Reserve Bank President Charles Plosser is due to discuss economic recovery and Fed role as a central bank before the Blair County Chamber of Commerce in Altoona, Pennsylvania at 8:20 AM ET. Also, Minneaopolis Federal Reserve Bank President Narayana Kocherlakota is scheduled to speak on entrepreneurship and the economy to the Metropolitan Economic Development Association in Minneapolis.

Retail sales of food and retail companies with one or more establishments that sell merchandise and associated services to final consumers are slated to be released at 8:30 AM ET. For May, economists estimate 0.3% growth in retail sales, while retail sales excluding autos is likely to have risen 0.1%.

In April, retail sales rose 0.4% month-over-month compared to the 2.1% growth in the previous month. Economists expected a mere 0.2% increase. Annually, retail sales were 8.8% higher.

Excluding a 0.5% rise in sales by motor vehicle and parts dealers, sales increased by a 0.4% in April compared to a 1.2% increase in the previous month. Economists had expected ex-auto sales to edge up by 0.5%.

The preliminary report of the Reuters/University of Michigan’s consumer sentiment survey for June is scheduled to be released at 9.55 AM ET. The consumer sentiment index is expected to rise to 74.8 from May’s 73.6.

The Commerce Department is scheduled to release its business inventories report for April at 10 AM ET. The report summarizes the results from the monthly retail trade, wholesale trade and factory goods orders surveys. The report is expected to show a 0.4% increase in business inventories for the month.

In March, business inventories rose 0.4% month-over-month, although they declined 5% compared with the year-ago period. Meanwhile, business sales rose 2.3% on a monthly basis and surged up 11.9% year-over-year. The business inventories to sales ratio was 1.24, lower than 1.46 in the year-ago period.

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