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The fragility of the economy puts on the back burner any discussion on exit strategies from unconventional monetary policies. It is very likely that policy normalization is still a long way off. The point was emphasized by the rise in the U.S. unemployment rate to its highest in over 25 years in August, which goes on to suggest that the U.S. consumer will continue to remain under pressure. Compensating the weakness in the domestic economy would be the strength in emerging Asia, which is likely to keep demand ticking.
The purchasing managers' indexes in China and Japan showed increases, while industrial production showed resurgence in South Korea. In the second quarter, the Indian economy grew at a 6.1% year-over-year rate, picking up pace from a 5.9% rate in the first quarter. That said, the Chinese growth outlook is clouded, given expectations that investment will be restrained by slowing credit growth.
The finance ministers and central bank heads of the G-20 nations, who met in London over the weekend, echoed caution. They discussed the state of the global economy, reforming of the World Bank and the IMF and reshaping of the global financial system. Terming the recovery as uneven across regions, the G-20 nations cautioned that it is too early to conclude that the recovery has gained traction. Therefore, the nations expressed commitment to maintain their fiscal and monetary policy stimulus policies. The approach on the exit strategies is likely to depend on the sustainability of the economic recovery.
In the U.S., the market took kindly to the Labor Department's monthly non-farm payroll employment report that revealed a loss of 216,000 jobs in August, smaller than the 230,000 decline in non-farm payrolls expected by economists. The manufacturing sector lost 65,000 jobs compared to the 63,000 jobs lost in the manufacturing sector. On the other hand, the health and education sector added 52,000 jobs. While the unemployment rate ticked up to 9.7% from 9.4% in July, average hourly earnings rose 0.3%.
The purchasing managers' surveys were upbeat. The Institute for Supply Management's manufacturing index rose to 52.9 in August from 48.9 in July, with the reading showing an expansion for the first time in a year and a half. Economists had estimated a reading of 50.5. Eleven of the eighteen manufacturing industries showed expansion. The new orders index climbed to 64.9, its highest level since the end of 2004, and the production index rose 4 points to 61.9. Jumping 10 points to 65, the prices paid index moved to its highest reading in a year.
According to ISM, the August reading is consistent with an annual rate of real GDP growth of 3.7%. That said, the positive impact of the cash for clunkers-induced auto sales on orders and production creates some uneasiness due to the fact that auto sales may suffer in the coming months due to a pay back phenomena.
At the same time, the ISM's non-manufacturing index rose 2 points to 48.4 in August from 46.4 in July. The business activity index rose above the cut off '50' level for the first time since September 2008, with the index up 5 points to 51.3. While the new orders index rose about 2 points to 49.9, the index of backlog orders fell 1 point to 41. The prices paid soared 22 points to 63.1.
The ISM-Chicago's survey revealed that the business barometer index rose to the break-even level of 50 in August from 43.4 in July. Economists had expected a more modest improvement to 48. The production index climbed about 10 points to 52.9 and the new orders index rose 4.5 points to 52.5, while the index of backlog orders surged up to 45.8 in August from 32.1 in July. The employment index was in contraction zone for the twenty-first consecutive months, although it improved to 38.7 from 35.3. The prices paid index also rose, climbing 15 points to 50.
The housing market reports released last week suggested either improvement or a move towards stabilization. The National Association of Realtors said its pending home sales index rose 3.2% in July compared to the previous month, marking the sixth straight month of growth. The index, considered a leading indicator for existing home sales, should bode well for the measure.
Meanwhile, construction spending in July declined 0.2% month-over-month, in line with expectations. Spending on single-family home building climbed 7%, marking the sharpest advance since 1983, while multi-family construction spending declined 3.3%. Private construction spending edged up 0.1% compared to a 0.7% drop in public construction spending. Going by the report and the downward revisions to the previous month's numbers, it is likely that the second quarter GDP will be revised down by 0.1%. Additionally, the recent rebound in single-family construction spending may lead to a turnaround in residential construction, which has been acting as a drag on growth in each of the past 14 quarters.
The Labor Department said second quarter non-farm productivity was revised up 0.2 percentage points to an annual rate of 6.6% compared to the previous quarter. Annually, productivity is up 1.9%. The increase came despite a drop in output, and was aided by firms slashing the number of hours worked. Unit labor costs were down at a 5.9% sequential rate and were down 1.2% from a year-ago. Although the scenario does not bode well in the short term, especially from the labor market perspective, in the long run it shores up the profitability of companies, which could facilitate hiring.
Meanwhile, the minutes of the August FOMC meeting revealed that there hasn't been any change to the Fed's growth outlook, although the committee members believed that downside risks have considerably reduced. The members seem to concur that the nation will return to growth in the second half of 2009. The FOMC is resigned prospects of a very slow recovery, given the sad state of affairs in the labor market. The Fed also expects a significant slowing in core inflation. However, the fed did not shed much light into the timing or conditions for an exit from its unconventional policy strategies.
The unfolding holiday-shortened week has a light economic calendar, with only the Reuters/University of Michigan's preliminary consumer sentiment report for September, the Beige Book and the weekly jobless claims reports likely to have any meaningful impact on the markets.
Apart from these reports, traders may also watch the Commerce Department's trade balance report for July, the Labor Department's import and export prices report for August, the Federal Reserve's consumer credit report for July, the Commerce Department's wholesale inventories report for July and the weekly oil inventory report. Announcements concerning the results of the Treasury's auction of 3-year notes, 10-year notes and 30-year bonds, scheduled to be made public on Tuesday, Wednesday and Thursday, respectively may also draw the attention of traders.
The consumer sentiment index of Reuters/University of Michigan may most likely to stay in its recent range of 65 to 71, which is synonymous with weak spending. Sentiment is expected to improve notably only when the job market conditions turnaround.
The weekly jobless claims are likely to see a decline, in line with the recent declining trend. That said, the rate of decline is turning out to be too slow for one's liking. Meanwhile, the Fed's Beige Book is likely to offer an upbeat assessment of the economy, with the report likely to show that auto sales, manufacturing and residential construction improved. However, the report is likely to acknowledge the weakness in the commercial real estate market.
The trade deficit is expected to widen in July, as export growth is likely to be restrained by a decline in aircraft orders. However, import volumes should see strength, as auto parts imports surged to keep pace with the ramp up in domestic vehicle production.
Monday
The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET. Consumer credit for July is likely to show a decline of $4 billion.
In June, consumer credit declined at an annual rate of 5% to $2.50 trillion. Among the components, revolving credit, which is tied to credit card loans fell to $917 billion from May's $922.3 billion, while the non-revolving credit tied to auto loans fell to $1.586 trillion from $1.59 trillion.
Tuesday
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.
Wednesday
There aren't any key economic reports scheduled to be released on Wednesday.
Chicago Federal Reserve Bank President Charles Evans, a FOMC voting member, is due to speak at 8 AM ET. At 1:55 AM ET, Dallas Federal Reserve President Richard Fisher is due to speak.
Thursday
The trade gap data for July is due out at 8:30 AM ET. Economists estimate that the trade gap widened to $27.4 billion in the month. The trade gap measures the difference between imports and exports of both tangible goods and services.
In June, the trade deficit was $27 billion, wider than the deficit of $26 million in May. Economists estimated that the trade gap to have widened to $28.6 billion in the month. In June, exports increased $2.4 billion to $125.8 billion and imports rose $3.5 billion to $152.8 billion. The goods deficit climbed $1.2 billion to $38.4 billion and the services surplus rose $0.1 billion to $11.4 billion.
The Labor Department is due to release its customary jobless claims report for the week ended September 5th at 8:30 AM ET. Economists expect a modest slippage in claims to 560,000.
There was a modest decrease in first-time claims for unemployment benefits in the week ended August 29th, with the decrease following an upward revision to previous week's initial jobless claims.
Jobless claims edged down to 570,000 from the previous week's revised figure of 574,000. Economists had been expecting jobless claims to slip to 564,000 from the 570,000 originally reported for the previous week.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended September 4th at 11 AM ET.
The previous week's report showed that crude oil stockpiles edged down 0.4 million barrels in the week ended August 28th to 343.7 million. Inventories of crude oil remained above the upper boundary of the average range.
Gasoline inventories fell by 3 million barrels but it still remained in the upper half of the average range. At the same time, distillate fuel stockpiles rose by 1.2 million barrels and were above the upper boundary of the average range. Refinery capacity utilization averaged 84.7% over the four weeks ended August 28 compared to 84% in the previous week.
Atlanta Federal Reserve President Dennis Lockhart is scheduled to speak at 12:30 AM ET.
Friday
The export & import price indexes for August, which gives the changes in the prices of non-military goods and services traded between the U.S. and the rest of the world, are due out at 8:30 AM ET.
In July, the import price index declined 0.7% month-over-month, reversing some of the 2.6% increase in the previous month. On a year-over-year basis, the index was down 19.3%.
The decline reflected a 2.8% increase in petroleum import prices, while non-petroleum import prices were down a more modest 0.2%. Export prices eased at a 0.3% rate in July compared to a downwardly revised 0.5% increase in May. Agricultural export prices fell 4.9% compared to 0.2% growth in export prices of non-agricultural commodities. On a year-over-year basis, export prices declined 8.1%.
The Reuters/University of Michigan's preliminary report on the consumer sentiment index for September is scheduled to be released at 9.55 AM ET. Consumer sentiment is expected to rise to 67.8 from the previous month's reading of 65.7.
The Commerce Department is due to release its wholesale inventories report at 10 AM ET. Economists expect wholesale inventories at the end of July to show a 1% decline.
Wholesale inventories declined by a bigger-than-expected 1.7% month-over-month in June. The previous month's numbers were revised down to show a 1.2% drop. However, wholesales rose 0.4%, resulting in an inventory-to-sales ratio of 1.26, the lowest level since October 2008.
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 $174 billion for August.
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