Inflation And Uneven Recovery
Although the Federal Reserve reaffirmed its commitment to stay with low rates for an extended period, the recent spike in oil prices has made things tough. The fragile recovery has almost sealed the fate of interest rates at least until the end of the year even if it means that inflation rises in the near term. The commodity price rally witnessed now is a product of both supply side concerns triggered by recent geopolitical events and demand pick up in emerging economies such as China and India.
Additionally, the dollar’s weakness is also exerting upward pressure on commodities denominated in the dollar. Real consumer spending growth slackened to 2.7 percent in the first quarter from the 4 percent pace in the fourth quarter despite nominal spending rising 0.8 points to 6.6 percent. Thus inflation has taken roughly 2.1 percentage points out of consumer spending. If prices keep rising, real spending slows down further in the second quarter. A notable slow down in the second quarter could set tongues wagging about QE3 measures.
Despite the threat posed by inflation, the Fed seems comfortable with its current stance due primarily to well anchored inflation expectations. The central bank is placing emphasis on longer-term inflation and this measure as revealed by the Reuters/University of Michigan’s survey fell back 0.3 points in April from the previous month. Against this backdrop, growth has become a little wobbly.
Manufacturing growth and con summer confidence moderated, while jobless claims broke back above the 400,000 level. To make matters, commodities began to trade at record levels. The first quarter had to face the wrath of adverse climatic conditions and inclement global geopolitical situation. We could therefore see a rebound from weakness and may be heading to a period of trend-like growth for the rest of the year. However, oil prices may call the shots and could sway growth either way.
The housing market recovery has not firmed up still, with home sales bouncing around the bottom and house prices not showing a pick up. New home sales rose 11.1 percent month-over-month to a seasonally adjusted annual rate of 300,000 in March. The February reading was upwardly revised to 270,000 units. Despite the surge, sales of new homes are still 78 percent below their peak.
Regionally, the Northeast, Midwest and West reported month-over-month increases, while sales in the South dipped 0.6 percent. Inventories in unit terms fell 1.1 percent to 183,000 units and in terms of the months of supply fell to 7.3 months. The median sales price of a new home was $213,800.
At the same time, the S&P/Case-Shiller house price survey showed that its 20-city house price index fell 0.2 month-over-month in March and was down 3.3 percent annually, marking the biggest drop since November 2009.
However, on a positive note, the National Association of Realtors’ pending home sales index rose 5.1 percent in March to a 3-month high, marking the second straight month of gains. Pending home sales were higher in the Midwest, South and West, while sales were down in the Northeast. Annually, pending home sales were down 12 percent.
After a brief slump, consumer confidence is slowly climbing again. The Conference Board said last week that its consumer confidence index rose 1.6 points to 65.4 in April, with confidence improving to its second highest level since early 2008. The present situation index rose 2.1 points to 39.6, while the expectations index edged up 1.3 points to 82.6.
The Reuters/University of Michigan’s survey showed that the consumer sentiment index rose 0.2 points to 69.8. While the current economic conditions fell 0.2 points to 82.5, the economic outlook index rose 0.4 points to 61.6.
The results of the Institute for Supply-Chicago’s manufacturing survey showed that its business conditions index fell to 67.6 in April from 70.6 in March and the drop was slightly steeper than what economists had expected. The new orders index fell 8.2 points to 74.5 and backlog orders declined 7.2 points to 62.4, while the employment index slipped about 2 points to 63.7.
As expected, first quarter GDP growth slowed to 1.8 percent sequentially from the 3.1 percent pace in the previous quarter. Construction, net trade and government spending negatively impacted growth, while consumer spending rose a better than expected 2.7 percent, although a slowdown from the 4 percent rate in the previous quarter. Spending on equipment and software was up 11.6 percent.
Meanwhile, another report showed that personal spending rose 0.6 month-over-month in March. The previous month’s gain was upwardly revised to 0.9 percent. Economists had expected spending growth of 0.5 percent for the month.
Meanwhile, personal income rose 0.5 percent, exceeding expectations for a 0.3 percent increase. Income growth was boosted by higher personal interest income and personal dividend income. Additionally, personal current taxes, which are a deduction from income, rose at a slower rate.
The core personal consumption expenditures price index rose 0.1 percent month-over-over, slower than the 0.2 percent growth in the previous month, and was 0.9 percent higher than a year-ago.
The FOMC statement released last week showed that the central bank now believes that the economic recovery is proceeding at a moderate pace compared to its assessment in March that the recovery is on a firmer footing. The committee added a comment on inflation stating that inflation has picked up in recent months, although it still believes that inflation expectations remain stable and underlying inflation is subdued.
The central bank also said it is sticking by its plan of re-investing principal payments from its securities holdings and will complete its purchase of $600 billion of longer-term treasury securities by the end of June. The committee repeated the statement reflecting its intention to leave interest rates at accommodative levels as long as it is warranted.
In the first ever press briefing of its kind, Chairman Ben Bernanke suggested that the trade offs for further QE are getting less attractive due to higher measured inflation. He also suggested that reinvestments will continue after the QE II measures end and the end of reinvesting could be construed as the beginning step of monetary policy tightening.
The revised forecast issued by the central bank means that GDP growth and the unemployment rate could be lower than earlier estimates, while inflation is likely to be higher. The Fed now expects GDP growth of 3.1 to 3.3 percent in 2011, down from the 3.4 to 3.9 percent growth forecast in January, while the estimate for the unemployment rate for the year was revised down to 8.4 to 8.7 percent from 8.8 to 9.0 percent. The estimate for core consumer price inflation for 2011 was upwardly revised to 1.3 to 1.6 percent from 1.0 to 1.3 percent.
Jobs data is likely to be the focus in the upcoming week, as traders look towards the Labor Department’s non-farm payrolls report and the ADP’s private sector employment report for confirmation of recent views that labor market conditions are improving. The results of the Institute for Supply Management’s manufacturing and non-manufacturing surveys and the weekly jobless claims report are also among the closely watched reports.
The Commerce Department’s construction spending report for March, the factory goods orders report for March, motor vehicle sales for April, the Labor Department’s preliminary first quarter productivity & costs report, the Federal Reserve’s consumer credit report, some Fed speeches and announcements concerning the Treasury auctions of 3-year and 10-year notes and 30-year bonds round up the other economic events of the week.
With the gains from productivity growth and other efficiencies from existing headcounts having largely been repeated, the employers in the U.S. have now no other recourse but to expand payrolls. Therefore, the employment market could sustain the recent pick up in the pace of job additions. That said, some moderation could be expected due to the softness of then jobless claims data of recent weeks.
Going by the results of the regional manufacturing surveys for April, the national manufacturing survey of the ISM is expected to show a moderation in manufacturing activity. Economists expect the index to drop below the ’60′ mark, reflecting shortages of components sourced from Japan. Nevertheless, BMO Capital Markets expects factory activity to show its strongest performance in 6 years due to abounding orders flows experienced by capital goods makers.
Monday
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 59.5 for April.
The headline-manufacturing index based on the national survey edged down 0.2 points to 61.2 in March. The production index rose to 69 in March from 66.3 in February, while the new orders index fell 4.7 points to 63.3. The employment index also receded, dropping 1.5 points to 63. Reflecting concerns over export slowdown in the aftermath of the Japanese earthquake, the index of exports declined 6.5 points to 56, although the prices paid index rose 3 points to 85.
The Commerce Department’s construction spending report to be released at 10 AM ET is expected to show a 0.5 percent increase in spending for March.
Construction spending fell 1.4 percent month-over-month in February following a revised 1.8 percent decline in January. Spending on private and public construction declined 1.4 percent and 1.3 percent, respectively. Among private construction activity, spending on residential construction fell 3.7 percent and commercial construction was down 0.8 percent.
Tuesday
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 Commerce Department is due to release its report on factory goods orders for March at 10 AM ET. Economists estimate factory good orders for the month to increase by 2 percent.
Orders for durable good, which make up the bulk of factory goods, were up 2.5 percent month-over-month in March. Even excluding transportation, orders rose a decent 1.3 percent. Apart from commercial aircraft orders and motor vehicle orders, electrical appliance and general machinery orders also remained buoyant. Core capital goods orders, considered a proxy for capital spending, rose 3.7 percent in March.
Wednesday
Boston Federal Reserve Bank President Eric Rosengren is due to speak to the NAIOP commercial real estate development association in Boston at 8 AM ET.
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 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 57 for April.
Activity in the sector expanded at a slower rate in March. Of the 18 industries surveyed, 16 reported growth. The index fell to 57.3 in March from 59.7 in February. The business activity index declined 7.2 points to 59.7 and the new orders index also dipped 0.3 points. On the other hand, the backlog orders index rose 4 points. The employment index dipped about 2 points to 53.7.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended April 29that 10:30 AM ET.
Crude oil stockpiles rose by 6.2 million barrels to 363.1 million barrels in the week ended April 22nd. Inventories climbed above the upper limit of the average range.
Meanwhile, gasoline inventories fell by 2.5 million barrels and distillate inventories slid by 1.8 million barrels. Gasoline stockpiles fell to the lower limit of the average range, while distillate inventories were above the upper limit of the average range.
San Francisco Federal Reserve Bank President John Williams is scheduled to deliver his first policy speech on maintaining price stability in a global economy, in Lost Angeles at 3 PM ET. Additionally, Atlanta Federal Reserve Bank President Dennis Lockhart is also due to speak on the economic outlook to the National Funding Association in Atlanta at 7 PM ET.
Thursday
The Labor Department is due to release its customary jobless claims report for the week ended April 30th at 8:30 AM ET. Economists expect a small decline in claims to 410,000.
Initial claims for unemployment benefits rose to 429,000 in the week ended April 23rd from 404,000 in the previous week, marking the highest level since the end of January. The 4-week average rose to 409,000. On the other hand, continuing claims calculated with a week’s lag fell by 68,000 in the week ended April 16th.
The U.S. Labor Department is also scheduled to release its preliminary first quarter non-farm productivity and unit labor costs at 8:30 AM. Economists expect productivity growth of 1.3 percent, while unit costs are expected to be down 0.6 percent.
In the fourth quarter, productivity increased by 2.6 percent, while unit labor costs fell by 0.6 percent in the fourth quarter.
Federal Reserve Chairman Ben Bernanke is set to speak to the Chicago Fed’s Annual Conference on Bank Structure and Competition in Chicago at 9:30 AM ET. At 1:15 PM ET, Minneapolis Federal Reserve Bank President Narayana Kocherlakota will speak on contingent planning for monetary policy in Santa Barbara, California.
Friday
The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM. Economists expect non-farm payrolls for April to increase by 185,000 and they expect the unemployment rate to remain unchanged at 8.8 percent.
Employment in the U.S. increased by a little more than economists had been expecting in the month of March, with the increase reflecting job growth in a variety of sectors.
Non-farm payroll employment increased by 216,000 jobs in March following an upwardly revised increase of 194,000 jobs in February. Economists had expected employment to increase by about 200,000 jobs compared to the addition of 192,000 jobs originally reported for the previous month.
Additionally, the unemployment rate edged down to 8.8 percent in March from 8.9 percent in February. The modest decrease surprised economists, who had expected the unemployment rate to remain at 8.9 percent.
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 an increase of $5 billion.
In February, consumer credit rose $7.627 billion, the biggest monthly increase since June 2008. None-revolving credit tied to auto loans rose $10.3 billion, while revolving credit declined $2.71 billion.
Although the Federal Reserve reaffirmed its commitment to stay with low rates for an extended period, the recent spike in oil prices has made things tough. The fragile recovery has almost sealed the fate of interest rates at least until the end of the year even if it means that inflation rises in the near term. The commodity price rally witnessed now is a product of both supply side concerns triggered by recent geopolitical events and demand pick up in emerging economies such as China and India.
Additionally, the dollar’s weakness is also exerting upward pressure on commodities denominated in the dollar. Real consumer spending growth slackened to 2.7 percent in the first quarter from the 4 percent pace in the fourth quarter despite nominal spending rising 0.8 points to 6.6 percent. Thus inflation has taken roughly 2.1 percentage points out of consumer spending. If prices keep rising, real spending slows down further in the second quarter. A notable slow down in the second quarter could set tongues wagging about QE3 measures.
Despite the threat posed by inflation, the Fed seems comfortable with its current stance due primarily to well anchored inflation expectations. The central bank is placing emphasis on longer-term inflation and this measure as revealed by the Reuters/University of Michigan’s survey fell back 0.3 points in April from the previous month. Against this backdrop, growth has become a little wobbly.
Manufacturing growth and con summer confidence moderated, while jobless claims broke back above the 400,000 level. To make matters, commodities began to trade at record levels. The first quarter had to face the wrath of adverse climatic conditions and inclement global geopolitical situation. We could therefore see a rebound from weakness and may be heading to a period of trend-like growth for the rest of the year. However, oil prices may call the shots and could sway growth either way.
The housing market recovery has not firmed up still, with home sales bouncing around the bottom and house prices not showing a pick up. New home sales rose 11.1 percent month-over-month to a seasonally adjusted annual rate of 300,000 in March. The February reading was upwardly revised to 270,000 units. Despite the surge, sales of new homes are still 78 percent below their peak.
Regionally, the Northeast, Midwest and West reported month-over-month increases, while sales in the South dipped 0.6 percent. Inventories in unit terms fell 1.1 percent to 183,000 units and in terms of the months of supply fell to 7.3 months. The median sales price of a new home was $213,800.
At the same time, the S&P/Case-Shiller house price survey showed that its 20-city house price index fell 0.2 month-over-month in March and was down 3.3 percent annually, marking the biggest drop since November 2009.
However, on a positive note, the National Association of Realtors’ pending home sales index rose 5.1 percent in March to a 3-month high, marking the second straight month of gains. Pending home sales were higher in the Midwest, South and West, while sales were down in the Northeast. Annually, pending home sales were down 12 percent.
After a brief slump, consumer confidence is slowly climbing again. The Conference Board said last week that its consumer confidence index rose 1.6 points to 65.4 in April, with confidence improving to its second highest level since early 2008. The present situation index rose 2.1 points to 39.6, while the expectations index edged up 1.3 points to 82.6.
The Reuters/University of Michigan’s survey showed that the consumer sentiment index rose 0.2 points to 69.8. While the current economic conditions fell 0.2 points to 82.5, the economic outlook index rose 0.4 points to 61.6.
The results of the Institute for Supply-Chicago’s manufacturing survey showed that its business conditions index fell to 67.6 in April from 70.6 in March and the drop was slightly steeper than what economists had expected. The new orders index fell 8.2 points to 74.5 and backlog orders declined 7.2 points to 62.4, while the employment index slipped about 2 points to 63.7.
As expected, first quarter GDP growth slowed to 1.8 percent sequentially from the 3.1 percent pace in the previous quarter. Construction, net trade and government spending negatively impacted growth, while consumer spending rose a better than expected 2.7 percent, although a slowdown from the 4 percent rate in the previous quarter. Spending on equipment and software was up 11.6 percent.
Meanwhile, another report showed that personal spending rose 0.6 month-over-month in March. The previous month’s gain was upwardly revised to 0.9 percent. Economists had expected spending growth of 0.5 percent for the month.
Meanwhile, personal income rose 0.5 percent, exceeding expectations for a 0.3 percent increase. Income growth was boosted by higher personal interest income and personal dividend income. Additionally, personal current taxes, which are a deduction from income, rose at a slower rate.
The core personal consumption expenditures price index rose 0.1 percent month-over-over, slower than the 0.2 percent growth in the previous month, and was 0.9 percent higher than a year-ago.
The FOMC statement released last week showed that the central bank now believes that the economic recovery is proceeding at a moderate pace compared to its assessment in March that the recovery is on a firmer footing. The committee added a comment on inflation stating that inflation has picked up in recent months, although it still believes that inflation expectations remain stable and underlying inflation is subdued.
The central bank also said it is sticking by its plan of re-investing principal payments from its securities holdings and will complete its purchase of $600 billion of longer-term treasury securities by the end of June. The committee repeated the statement reflecting its intention to leave interest rates at accommodative levels as long as it is warranted.
In the first ever press briefing of its kind, Chairman Ben Bernanke suggested that the trade offs for further QE are getting less attractive due to higher measured inflation. He also suggested that reinvestments will continue after the QE II measures end and the end of reinvesting could be construed as the beginning step of monetary policy tightening.
The revised forecast issued by the central bank means that GDP growth and the unemployment rate could be lower than earlier estimates, while inflation is likely to be higher. The Fed now expects GDP growth of 3.1 to 3.3 percent in 2011, down from the 3.4 to 3.9 percent growth forecast in January, while the estimate for the unemployment rate for the year was revised down to 8.4 to 8.7 percent from 8.8 to 9.0 percent. The estimate for core consumer price inflation for 2011 was upwardly revised to 1.3 to 1.6 percent from 1.0 to 1.3 percent.
Jobs data is likely to be the focus in the upcoming week, as traders look towards the Labor Department’s non-farm payrolls report and the ADP’s private sector employment report for confirmation of recent views that labor market conditions are improving. The results of the Institute for Supply Management’s manufacturing and non-manufacturing surveys and the weekly jobless claims report are also among the closely watched reports.
The Commerce Department’s construction spending report for March, the factory goods orders report for March, motor vehicle sales for April, the Labor Department’s preliminary first quarter productivity & costs report, the Federal Reserve’s consumer credit report, some Fed speeches and announcements concerning the Treasury auctions of 3-year and 10-year notes and 30-year bonds round up the other economic events of the week.
With the gains from productivity growth and other efficiencies from existing headcounts having largely been repeated, the employers in the U.S. have now no other recourse but to expand payrolls. Therefore, the employment market could sustain the recent pick up in the pace of job additions. That said, some moderation could be expected due to the softness of then jobless claims data of recent weeks.
Going by the results of the regional manufacturing surveys for April, the national manufacturing survey of the ISM is expected to show a moderation in manufacturing activity. Economists expect the index to drop below the ’60′ mark, reflecting shortages of components sourced from Japan. Nevertheless, BMO Capital Markets expects factory activity to show its strongest performance in 6 years due to abounding orders flows experienced by capital goods makers.
Monday
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 59.5 for April.
The headline-manufacturing index based on the national survey edged down 0.2 points to 61.2 in March. The production index rose to 69 in March from 66.3 in February, while the new orders index fell 4.7 points to 63.3. The employment index also receded, dropping 1.5 points to 63. Reflecting concerns over export slowdown in the aftermath of the Japanese earthquake, the index of exports declined 6.5 points to 56, although the prices paid index rose 3 points to 85.
The Commerce Department’s construction spending report to be released at 10 AM ET is expected to show a 0.5 percent increase in spending for March.
Construction spending fell 1.4 percent month-over-month in February following a revised 1.8 percent decline in January. Spending on private and public construction declined 1.4 percent and 1.3 percent, respectively. Among private construction activity, spending on residential construction fell 3.7 percent and commercial construction was down 0.8 percent.
Tuesday
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 Commerce Department is due to release its report on factory goods orders for March at 10 AM ET. Economists estimate factory good orders for the month to increase by 2 percent.
Orders for durable good, which make up the bulk of factory goods, were up 2.5 percent month-over-month in March. Even excluding transportation, orders rose a decent 1.3 percent. Apart from commercial aircraft orders and motor vehicle orders, electrical appliance and general machinery orders also remained buoyant. Core capital goods orders, considered a proxy for capital spending, rose 3.7 percent in March.
Wednesday
Boston Federal Reserve Bank President Eric Rosengren is due to speak to the NAIOP commercial real estate development association in Boston at 8 AM ET.
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 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 57 for April.
Activity in the sector expanded at a slower rate in March. Of the 18 industries surveyed, 16 reported growth. The index fell to 57.3 in March from 59.7 in February. The business activity index declined 7.2 points to 59.7 and the new orders index also dipped 0.3 points. On the other hand, the backlog orders index rose 4 points. The employment index dipped about 2 points to 53.7.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended April 29that 10:30 AM ET.
Crude oil stockpiles rose by 6.2 million barrels to 363.1 million barrels in the week ended April 22nd. Inventories climbed above the upper limit of the average range.
Meanwhile, gasoline inventories fell by 2.5 million barrels and distillate inventories slid by 1.8 million barrels. Gasoline stockpiles fell to the lower limit of the average range, while distillate inventories were above the upper limit of the average range.
San Francisco Federal Reserve Bank President John Williams is scheduled to deliver his first policy speech on maintaining price stability in a global economy, in Lost Angeles at 3 PM ET. Additionally, Atlanta Federal Reserve Bank President Dennis Lockhart is also due to speak on the economic outlook to the National Funding Association in Atlanta at 7 PM ET.
Thursday
The Labor Department is due to release its customary jobless claims report for the week ended April 30th at 8:30 AM ET. Economists expect a small decline in claims to 410,000.
Initial claims for unemployment benefits rose to 429,000 in the week ended April 23rd from 404,000 in the previous week, marking the highest level since the end of January. The 4-week average rose to 409,000. On the other hand, continuing claims calculated with a week’s lag fell by 68,000 in the week ended April 16th.
The U.S. Labor Department is also scheduled to release its preliminary first quarter non-farm productivity and unit labor costs at 8:30 AM. Economists expect productivity growth of 1.3 percent, while unit costs are expected to be down 0.6 percent.
In the fourth quarter, productivity increased by 2.6 percent, while unit labor costs fell by 0.6 percent in the fourth quarter.
Federal Reserve Chairman Ben Bernanke is set to speak to the Chicago Fed’s Annual Conference on Bank Structure and Competition in Chicago at 9:30 AM ET. At 1:15 PM ET, Minneapolis Federal Reserve Bank President Narayana Kocherlakota will speak on contingent planning for monetary policy in Santa Barbara, California.
Friday
The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM. Economists expect non-farm payrolls for April to increase by 185,000 and they expect the unemployment rate to remain unchanged at 8.8 percent.
Employment in the U.S. increased by a little more than economists had been expecting in the month of March, with the increase reflecting job growth in a variety of sectors.
Non-farm payroll employment increased by 216,000 jobs in March following an upwardly revised increase of 194,000 jobs in February. Economists had expected employment to increase by about 200,000 jobs compared to the addition of 192,000 jobs originally reported for the previous month.
Additionally, the unemployment rate edged down to 8.8 percent in March from 8.9 percent in February. The modest decrease surprised economists, who had expected the unemployment rate to remain at 8.9 percent.
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 an increase of $5 billion.
In February, consumer credit rose $7.627 billion, the biggest monthly increase since June 2008. None-revolving credit tied to auto loans rose $10.3 billion, while revolving credit declined $2.71 billion.
Although the Federal Reserve reaffirmed its commitment to stay with low rates for an extended period, the recent spike in oil prices has made things tough. The fragile recovery has almost sealed the fate of interest rates at least until the end of the year even if it means that inflation rises in the near term. The commodity price rally witnessed now is a product of both supply side concerns triggered by recent geopolitical events and demand pick up in emerging economies such as China and India.
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