Market Focus: This week covers almost every facet of the economy. This week we have reports on Manufacturing, real estate, Inflation, Jobs, Sales, confidence, and the FOMC. Couple all of this with the second half of earnings and it’s anyone’s guess. Earnings have pushed the markets into record territory so far so it’s either more of the same or some consolidation.
Industrial Production: The index of industrial production is available nationally by market and industry groupings. The major groupings are comprised of final products (such as consumer goods, business equipment and construction supplies), intermediate products and materials. The industry groupings are manufacturing (further subdivided into durable and nondurable goods), mining and utilities. The capacity utilization rate — reflecting the resource utilization of the nation’s output facilities — is available for the same market and industry groupings. The consensus estimate is for no change from last month’s .4% in the month over month. The Manufacturing index is however is projected to fall from .7% to .3%. What it means to you: Industrial production and capacity utilization indicate not only trends in the manufacturing sector, but also whether resource utilization is strained enough to forebode inflation. Also, industrial production is an important measure of current output for the economy and helps to define turning points in the business cycle (start of recession and start of recovery).
Pending Home Sales Index: The National Association of Realtors developed the pending home sales index as a leading indicator of housing activity. As such, it is a leading indicator of existing home sales, not new home sales. A pending sale is one in which a contract was signed, but not yet closed. The consensus estimate is for a 0.0% after last month’s -1.6% increase. What it means to you: This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy.
Dallas Fed MFG Survey: The Dallas Fed conducts this monthly survey of manufacturers in Texas regarding their operations in the state. Participants from across the state represent a variety of industries. Participants are asked whether various indicators have increased, decreased or remained unchanged. Answers cover changes over the previous month and expectations for activity six months into the future. The breakeven point for each index is zero with positive numbers indicating growth and negative numbers reflecting decline. What it means to you: By tracking economic data such as the Dallas Fed survey, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth so that it won’t lead to inflation. The Dallas Fed survey gives a detailed look at the manufacturing sector, how busy it is and where things are headed.
2 Year Note Auction
The FOMC Meeting begins: The Federal Open Market Committee meets eight times a year in order to determine the near-term direction of monetary policy. For monetary policy, the FOMC evaluates the relative concerns over the outlook for economic growth (too strong, too weak, about right) and pending inflation (too high, too low, about right). The FOMC then determines whether short-term interest rates should be raised, lowered, or left unchanged to accomplish its objectives of healthy economic growth and low inflation. The FOMC consists of the seven Governors of the Federal Reserve Board (assuming no seats are vacant) and five Federal Reserve Bank presidents. What it means to you: The interest rate set by the Fed, the federal funds rate, serves as a benchmark for all other rates. A change in the fed funds rate, the lending rate banks charge each other for the use of overnight funds, translates directly through to all other interest rates from Treasury bonds to mortgage loans. It also changes the dynamics of competition for investor dollars.
Producer Price Index: The Producer Price Index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods received by producers. The consensus estimate is for a .2% gain in the overall number and a .1% gain in the core rate. Slightly higher than last month’s 0% but still very low. What it means to you: Changes in the producer price index for finished goods are considered a precursor of consumer price inflation. If the prices that manufacturers pay for their raw materials rise, they would have to raise the prices that consumers pay for their finished goods in order to not decrease profit margins. Changes in the supply and demand for labor will affect wage changes with a delay because wages are institutionalized and contractual. However, commodity prices react more quickly to changes in supply and demand.
Retail Sales: Retail sales measure the total receipts at stores that sell durable and nondurable goods. Consumer spending accounts for two-thirds of GDP and is therefore a key element in economic growth. The consensus estimate is for a rise of 0% less than last month’s .2%. And an increase of .3% excluding autos and gas after last month’s .1% increase. What it means to you: Retail sales are a major indicator of consumer spending trends because they account for nearly one-half of total consumer spending and approximately one-third of aggregate economic activity.
S & P Case-Shiller: The S&P/Case-Shiller home price index tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S. The composite indexes and the regional indexes are seen by the markets as measuring changes in existing home prices and are based on single-family home re-sales. The indexes are based on single-family dwellings with two or more sales transactions. Condominiums and co-ops are excluded as is new construction. What it means to you: Home values affect much in the economy – especially the housing and consumer sectors. Periods of rising home values encourage new construction while periods of soft home prices can damp housing starts. Changes in home values play key roles in consumer spending and in consumer financial health. Many economists believe that the U.S. economy and especially the depressed housing sector will not recover until home prices firm back up. This makes watching home prices all the more important for the investor.
Business Inventories: Business inventories are the dollar amount of inventories held by manufacturers, wholesalers, and retailers. The level of inventories in relation to sales is an important indicator of the near-term direction of production activity. The consensus estimate is for a decrease from last month’s .4% to 3%. This will still leave inventories historically low. What it means to you: Rising inventories can be an indication of business optimism that sales will be growing in the coming months. By looking at the ratio of inventories to sales, investors can see whether production demands will expand or contract in the near future. For example, if inventory growth lags sales growth, then manufacturers will have to boost production lest commodity shortages occur. On the other hand, if unintended inventory accumulation occurs (that is, sales do not meet expectations), then production will probably have to slow while those inventories are worked down.
Consumer Confidence: The Conference Board compiles a survey of consumer attitudes on present economic conditions and expectations of future conditions. Three thousand households across the country are surveyed each month. The consensus estimate is for a decrease from 79.7 to 75. What it means to you: Consumer spending drives two-thirds of the economy and if the consumer is not confident, the consumer will not be willing to pull out the big bucks. Confidence impacts consumer spending which affects economic growth.
State Street Investor Confidence: The State Street Investor Confidence Index measures confidence by looking at actual levels of risk in investment portfolios. This is not an attitude survey. The State Street Investor Confidence Index measures confidence directly by assessing the changes in investor holdings of equities. The more of their portfolio that institutional investors are willing to invest in equities, the greater their confidence. What it means to you: “State Street believes direct measurement, rather than a survey of portfolio managers who often don’t have time to fill out monthly questionnaires, is a more reliable approach to consumer confidence. The investor confidence index is compiled with techniques based on modern portfolio theory. According to State Street, “the more of their portfolios that professional investors are willing to devote to riskier as opposed to safer investments, the greater their risk appetite or confidence.”
ICSC Goldman Store Sales: This weekly measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. It accounts for roughly 10 percent of total retail sales. What it means to you: Consumer spending accounts for more than two-thirds of the economy, so if you know what consumers are up to, you’ll have a pretty good handle on where the economy is headed.
Redbook: A weekly measure of sales at chain stores, discounters, and department stores. It is a less consistent indicator of retail sales than the weekly ICSC index. What it means to you: The pattern in consumer spending is often the foremost influence on stock and bond markets.
5 Year Note Auction
ADP: The ADP national employment report is computed from a subset of ADP records that in the last six months of 2008, represented approximately 400,000 U.S. business clients and approximately 24 million U.S. employees working in all private industrial sectors. What it means to you: The employment statistics also provide insight on wage trends, and wage inflation is high on the list of enemies for the Federal Reserve. Fed officials constantly monitor this data watching for even the smallest signs of potential inflationary pressures, even when economic conditions are soggy. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.
CPI: The Consumer Price Index is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation. The consensus estimate is for an increase of .2% after last month’s .1% increase and an increase in the core rate of 2% (slightly higher then last month’s .1%). What it means to you: The consumer price index is the most widely followed monthly indicator of inflation. The CPI is considered a cost-of-living measure since it is used to adjust contracts of all types that are tied to inflation. For monetary policy, the Federal Reserve generally follows “headline” and “core” inflation. This latter measure excludes the volatile food and energy components. The Fed’s preferred inflation measure is not the CPI but the personal consumption price index because it reflects what consumers are actually buying during any given period-the component weights are updated annually while those for the CPI are updated infrequently.
FOMC Announcement: The FOMC also determines whether the Fed should add or subtract liquidity in credit markets separately from that related to changes in the fed funds rate. The Fed announces its policy decision (typically whether to change the fed funds target rate) at the end of each FOMC meeting. The consensus estimate is for the Federal Funds Rate to remain the same. What it means to you: Interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.
EIA Petroleum Report: The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S. The level of inventories helps determine prices for petroleum products. What it means to you: Petroleum product prices are determined by supply and demand – just like any other good and service. During periods of strong economic growth, one would expect demand to be robust. If inventories are low, this will lead to increases in crude oil prices – or price increases for a wide variety of petroleum products such as gasoline or heating oil.
7 Year Note Auction
Weekly Jobless Claims: New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility. The consensus estimate is for a decrease from 350,000 to 335,000. What it means to you: By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it’s a good bet that interest rates will rise.
Challenger Job Cut Report: This monthly report counts and categorizes announcements of corporate layoffs based on mass layoff data from state departments of labor. The job-cut report must be analyzed with caution. It doesn’t distinguish between layoffs scheduled for the short-term or the long term, or whether job cuts are handled through attrition or actual layoffs. Also, the job-cut report does not include jobs eliminated in small batches over a longer time period. What it means to you: The job-cut report is basically a rehash of the weekly jobless claims report but provides additional insight into where layoffs are occurring. There is industry and geographic (states) detail that is not available with weekly jobless claims.
Chicago PMI: Manufacturing and non-manufacturing firms are both surveyed. Hence, it is not directly comparable to pure manufacturing surveys. Readings above 50 percent indicate an expanding business sector. The consensus estimate is to rise to 55 after last month’s reading of 55.7. What it means to you: The Chicago PMI gives a detailed look at the Chicago region’s manufacturing and non-manufacturing sectors. Many market players don’t realize that non-manufacturing activity is covered in this index and tend to focus on the manufacturing side only. On its own, it can be viewed as a regional indicator of general business activity.
Bloomberg Consumer Comfort Index: A weekly, random-sample survey tracking Americans’ views on the condition of the U.S. economy, their personal finances and the buying climate. What it means to you: The pattern in consumer attitudes can be a key influence on stock and bond markets. Consumer spending drives two-thirds of the economy and if the consumer is not confident, the consumer will not be willing to spend. Confidence impacts consumer spending which affects economic growth.
Motor Vehicle Sales: Unit sales of domestically produced cars and light duty trucks (including sport utility vehicles and mini-vans). Motor vehicle sales are good indicators of trends in consumer spending. The consensus estimate is for 11.9 million units (slightly more than last month’s 11.8 million). What it means to you: Since motor vehicle sales are an important element of consumer spending, market players watch this closely to get a handle on the direction of the economy. The pattern of consumption spending is one of the foremost influences on stock and bond markets. In a more specific sense, auto and truck sales show market conditions for auto makers and the slew of auto-related companies. Given that most consumers borrow money to buy cars or trucks, sales also reflect confidence in current and future economic conditions.
PMI Manufacturing Index: Purchasing Managers’ Manufacturing Index (PMIs) is based on monthly questionnaire surveys of selected companies which provide an advance indication of what is really happening in the private sector economy. What it means to you: PMI manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
ISM Mfg Index: The Institute for Supply Management surveys more than 300 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories. Readings above (below) 50 percent indicate an expanding (contracting) factory sector. Export orders, import orders, backlog orders and prices paid for raw and unfinished materials are also measured, but these are not included in the overall index. The consensus estimate is to decrease from 56.2% to 55%. What it means to you: The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and not subject to revision. The ISM manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provides insight on commodity prices and clues regarding the potential for developing inflation.
Narayana Kocherlakota (Minneapolis Federal Reserve President) Speaks