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Green sprouts are of course visible. A telling evidence of the improvement has been retail sales, which showed strength almost across the board in August. The sprouts are being nurtured by a rebound in the activity in the manufacturing sector and the continued improvement seen in the housing market after activity plummeted to abysmal levels over a 3-year period. The improvement is not specific to the U.S. alone, with most global economies limping back to normalcy, supported by easy monetary policies and benevolent fiscal stimulus measures.
The underlying strength relayed by the retail sales report for August came as a whiff of fresh air, as traders were harboring doubts over whether consumers can put all their acts together and support a recovery that can be called lasting and sustainable. According to Danske Bank, the durability of the upturn in the medium term depends on the ability of final demand or in other words consumers to recover. Until the labor market recovers strongly enough to stem the job losses and create jobs, consumer spending may not show a strong resurgence. Therefore, the onus of keeping growth ticking rests on a recovery in investment and rising demand from Asia.
Most economists have predicated an upward adjustment of interest rates by the central banks on more convincing signs of an improvement in final demand. Therefore, it has become more or less certain that rate hikes will not begin until the middle of next year.
Last week's retail sales report showed a better-than-expected 2.7% month-over-month increase in August. Excluding autos, sales rose 1.1%, notably higher than the 0.4% growth expected by economists, suggesting that the strength extended much beyond autos, the sales of which jumped 10.6%. Gasoline was another category that saw strength and showed a 5.1% surge in sales. Most other categories also showed sales increases, except furniture and building materials, which saw sales drops of 1.6% and 1.2%, respectively.
So, the key take-away from the report was that the cash-for-clunkers induced auto sales did not lead to consumers avoiding the purchase of other goods. Nevertheless, retail sales were still 5.9% below year-ago levels.
In another positive report, the Federal Reserve's industrial production report showed that U.S. industrial output rose for the second straight month in August. Industrial output rose 0.8% month-over-month in August compared to the 0.6% growth expected by economists. Manufacturing production climbed 0.6% and still rose 0.4% excluding motor vehicle/part production, which jumped 5.5%. Capacity utilization came in at a better-than-expected 69.6%.
Manufacturing activity is picking up momentum, as reflected by the results of the Empire State manufacturing survey and the Philadelphia Fed's survey. The business conditions index based on the Empire State survey rose about 4 points to 18.9 in September, with the reading now at its highest level since November 2007. The new orders index rose 6.5 points to 19.8, while the shipment index fell by 9 points following increases in the two of the previous months. The future business conditions index rose 4 points, cementing expectations of a pick up in manufacturing activity.
The Philadelphia Fed's manufacturing index rose to 14.1 in September from 4.2 in August, reaching its highest level since June 2007. The shipment index climbed about 8 points. Although the backlog orders index rose 2 points, it still remained in negative territory. The new orders index declined to 3.3 from 4.2 in August and the employment index declined 1.4 points to -14.3. Inventories continued to contract, as reflected by an 18 point-drop in by the inventories index to -18.1. The 6-month outlook index dipped 9 points but remained positive.
Housing market reports continued to suggest stabilization. Last week, the Commerce Department said housing starts rose 1.5% month-over-month in August to 598,000, with the increase mainly due to a 23.5% jump in multi-family units. At the same time, single-family starts slipped following five straight months of gains. Region-wise, starts were higher in the Northeast and Midwest and remained unchanged in the West, while they fell in the South. Building permits, an indicator of future housing activity, also increased in August to 579,000.
First Trust Advisors surmises that residential investment may show an increase in the third quarter, which would mean the first gain since 2005. Although inventory levels are still high, the rate of homebuilding is still far below the underlying demand for housing based on population growth and scrappage.
The National Association of Home Builders released the results of its builder confidence survey, which showed that the housing market index rose for the third straight month in September, rising 1 point to 19. While the index measuring current sales conditions rose 2 points to 18, the index gauging sales expectations fell a point to 29. At the same time, the index measuring traffic of prospective buyer traffic rose a point to 17.
The producer price inflation report showed that higher gasoline prices led to a spike in the headline producer price inflation rate, which rose 1.7% month-over-month in August. Gasoline prices jumped 23%. The core producer price index rose 0.2%, slightly bigger than the 0.1% growth expected by economists.
At the same time, consumer price inflation report showed a 0.4% monthly increase in the headline index, a touch more than what economists had expected. A 9.1% jump in gasoline prices was responsible for much of the upside. Food prices edged up by 0.1%. The core consumer price index was up one-tenth of a percentage point compared to the previous month and rose 1.4% year-over-year.
The Commerce Department's business inventories report showed a 1% month-over-month decline in business inventories for July. Business sales rose 0.1%. Consequently, the business inventories to sales ratio was 1.36 compared to 1.38 in the month-ago period.
Although the unfolding week's calendar seems to be relatively light, there are a few key events and reports that could keep traders on tenterhooks. The focus of the week is likely to be the 2-day FOMC meeting to be concluded on Wednesday and the G-20 heads of governments' summit to be held in Pittsburgh on Friday. Additionally, traders may closely watch the National Association of Realtors' existing home sales report for August, the Commerce Department's new home sales report for August and the final reading of the Reuters/University of Michigan's consumer sentiment index for September.
Additionally, the durable goods orders report for August, the Conference Board's leading indicators index for August and the regularly scheduled weekly jobless claims report and crude oil inventory report may also draw some attention. The results of the Treasury auctions of 52-week bills, 2-year notes, 5-year notes and 10-year notes due to be announced this week could also impact market movement.
The FOMC members now seem to have divergent opinions over the course of interest rates. Some of the committee members are reportedly concerned about the need to discuss the timeframe for raising interest rates and exit strategies. The post-meeting policy statement of the September meeting is likely to relay more optimism on growth than the previous meeting's statement and the description of inflation and the inflation outlook is likely to be maintained unchanged. At the same time, it is believed that the Fed may soon announce the phasing out of its purchase program for agency debt and mortgage backed securities.
Existing as well as new home sales are likely to show another month of increases in August. The recent strength is partly attributable to government subsidies to first time buyers and it remains to be seen if the strength continues beyond November, when the program is set to expire.
Durable goods orders are likely to rise again in August, thereby reducing the annual percentage decline further. That said, aircraft orders are likely to show weakness following July's outsized gains. Sustainability of the gains in new orders is likely to hinge on whether sales strengthen in the near term.
Monday
The Conference Board is scheduled to release a report on the U.S. leading index for August at 10 AM ET. The consensus estimate calls for a 0.7% increase in the leading indicators index for the month.
In July, the leading indicators index of the Conference Board rose 0.6%, rising for the fourth straight month. Six of the ten indicators that make up the index showed month-over-month increases. The coincident index was flat in July, as gains in industrial production, real personal income and real business sales offset the decline in payroll employment.
Tuesday
There is no key economic report scheduled to be released on Tuesday and the focus is likely to be on the results of the treasury auctions of t52-week bills and 2-year notes.
Wednesday
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.
Crude oil stockpiles fell by 4.7 million barrels to 332.8 million barrels in the week ended September 11th, although inventories remained above the upper limit of the average range.
Gasoline stockpiles rose by 0.5 million barrels and remained near the upper limit of the average range, while distillate inventories increased by 2.2 million barrels. Stockpiles of distillate fuels remained above the upper boundary of the average range. Refinery capacity averaged 86.3% over the four weeks ended September 11th compared to 85.6% in the previous week.
The Federal Reserve Open Market Committee is scheduled to make an announcement regarding its near-term direction of monetary policy at 2:15 PM ET following the end of its 2-day monetary policy committee meeting. The Federal Open Market Committee consists of seven Governors of the Federal Reserve Board and five Federal Reserve Bank Presidents.
At its August meeting, the FOMC decided along the expected lines and maintained the fed funds futures rate unchanged. In its post-meeting policy statement, the Fed noted that economic activity is leveling out, an improvement from its previous opinion that the pace of contraction is slowing. There weren't any major changes to the references the committee made towards other measures.
Regarding its Treasury securities purchasing program, the central bank said the committee would gradually slow the pace of these transactions. The central bank anticipates the full amount of $300 billion to be purchased by the end of October. The FOMC reiterated its commitment to retain interest rates at exceptionally low levels for an extended period.
Thursday
The Labor Department is due to release its customary weekly jobless claims report for the week ended September 19th at 8:30 AM ET. Economists expect a small increase in claims to 550,000.
First time claims for unemployment declined in the week ended September 12th, with the decrease following a downward revision to previous week's initial jobless claims.
Jobless claims fell to 545,000 from the previous week's revised figure of 557,000. Economists had been expecting jobless claims to rise to 555,000 from the 550,000 originally reported for the previous week. The four-week average declined 8,750 to 563,000 and continuing claims for the week ended September 5th fell 129,000 to 6.23 million.
The National Association of Realtors is scheduled to release its report on existing home sales for August at 10 AM ET. Economists estimate existing home sales of 5.35 million for the month.
Existing home sales rose for the fourth straight month in July to an annualized unit rate of 5.24 million. The reading marked the highest reading since August 2007. The National Association of Realtors noted that about 30% of the existing homes were bought by first time buyers, who took advantage of the $8,000 tax credit, which is due to expire on November 30th.
The median sales prices of existing home sales were down 15.1% year-over-year. Sales showed a month-over-month increase in all regions, except the West. The supply of existing homes rose 280,000 to 4.091 million units, resulting in the months-supply remaining unchanged at 9.4.
The Chair of the White House Council of Economic Advisers Christina Romer is scheduled to deliver the keynote address to the Chicago Federal Reserve Bank's International Banking Conference in Chicago at 1 PM ET
Friday
The Commerce Department is set to release its durable goods orders report, which gives the value of orders placed for goods designed to last for more than 3 years, at 8:30 AM ET. Economists look forward to a 1% increase in durable goods orders for August.
In July, durable goods orders rose by 5.1% to $169 billion following a 1.1% increase in June. The increase was aided by an 18.5% jump in transportation equipment orders. Shipments of manufactured durable goods rose 2% and unfilled orders declined by $0.1 billion. Inventories at the end of the month were down 0.9%.
The Commerce Department is also due to release its new home sales report for August at 10 AM ET. The consensus estimate calls for an increase in new homes sales to 440,000.
New home sales rose to a seasonally adjusted annual rate of 433,000 in July, up 9.6% from a revised 395,000 rate in June, with gains witnessed in the Northeast, South and West. New home sales were at their highest level since September 2008. The months supply of new homes fell to 7.5 in July from 8.5 in the previous month, with new home inventories declining by 9,000 to 271,000. The median price of new homes was down 11.5% year-over-year.
The Reuters/University of Michigan's final report on the consumer sentiment index for September is scheduled to be released at 9:55 AM ET on the same day. Consumer confidence is expected to edge up in the month, with economists forecasting an increase in the index to 70.5 from the mid-month reading of 70.2 and the July's reading of 65.7.
Federal Reserve Board Governor Kevin Warsh is due to deliver the keynote address to the Chicago Federal Reserve Bank's International Banking Conference in Chicago at 1:15 PM ET.
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