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Markets retreated in the past week despite the fairly encouraging economic readings, as the Dubai and Greek debt crises spread panic among the markets. Credit spreads widened in reaction to the developments due to fears that some of the big Western banks may have money involved. Downside risks to equities are now to the upside, as major banks may have to record big loan losses again even after they have attained a state of stabilization following the 2008 credit crisis.
The confidence vested on the embattled banks following the rescue packages announced by governments is at stake now. The Dubai crisis is a stark reminder of lurking fears over the health of the financial system. Danske Bank is of the view that bank earnings may disappoint in 2010, with the conjecture based on its expectations that there will be more Dubai-like cases in 2010. The firm is 'underweight' on banks, as it believes that investment returns will not reach 2009 levels, while loan losses will continue to rise in 2010 and perhaps also in 2011.
Domestically, positive tidings sprang forth from the housing and consumer sectors. Consumer confidence readings came in better than expected and home sales showed increases, while the rate of decline in house prices are slowing down. Continuing the string of positive readings, personal spending data for October was better than expected. Jobs data was encouraging, with the weekly jobless claims declining in the recent reporting week.
Meanwhile, data released from across the Atlantic in the past week showed that the growth is gaining traction in Europe. German Ifo survey showed strong improvement in the economic expectations index, pointing to a continued improvement in German industrial production. Barring the French manufacturing PMIs, most other PMI readings were better than expected.
Japan released strong export data that suggests that global trade is improving, while at the same time, Japanese unemployment rate fell for the third straight month. In reaction to the data, Japanese yen strengthened, rising to sub-85 levels briefly on Friday before weakening thereafter.
U.S. housing reports continue to be promising. The National Association of Realtors reported that existing home sales rose to a seasonally adjusted annual rate of 6.1 million units in October, up 10% from the previous month and marking their highest level since February 2007. The bulk of the increase was in single-family home sales. Home inventories, as measured by the months of supply fell to 7 months from 8 months in September. The median sales price of an existing home declined 7.1% year-over-year and fell 1.6% month-over-month to $173,100.
Meanwhile, the Commerce Department said new home sales totaled 430,000 in October compared to an upwardly revised reading of 405,000 in September. Geographically, only South showed gains. Inventories as measured in months of supply fell to 6.7 from the previous month's 7.4, with the October reading marking the lowest level since December 2006. The median price of a new home rose 0.71% month-over-month to $212,000.
The S&P/Case-Shiller survey showed that house prices declined at a slower year-over-year rate of 9.36% in September, although the decline was still steeper than the 9.10% decline expected by economists. On a monthly basis, house prices rose 0.33%, marking the fifth straight month of growth. Nine of the twenty cities showed monthly gains.
Consumer confidence recovered slowly from depressed levels. The Conference Board's survey revealed that its consumer confidence rose to 49.7 in November from 48.7 in October. Economists had estimated a decline by the index to 47.3. While the expectations index rose 1.5 points, the present situation index edged down 0.1 points. Consumers' assessment on the job market was still pessimistic, with the respondents saying that jobs were plentiful falling to its lowest level since February 1983, while those who said jobs were hard to get to rose to its highest level since May 1983.
The Reuters/ University of Michigan's consumer sentiment survey showed that the consumer sentiment index for November declined by a little than analysts expected. The index, although was revised up from the mid-month reading by four-tenths of a percentage point, declined to 67.4 from 70.6 in October.
At the same time, the Bureau of Economic Analysis released its revised third quarter GDP report, showing downwardly revised growth of 2.8%. Excluding government spending, all major components of GDP were revised unfavorably. Personal spending and fixed investment growth were revised lower and the drag from inventory depletion was now more severe than initially estimated. Additionally, net trade was revised to be a bigger drag on growth.
The minutes of the FOMC meeting released in the previous week indicated that there has not been much change in the economic outlook since September. The minutes showed that the committee members believed that the recovery will continue and will gradually strengthen over time. At the same time, the members are of the view that the unemployment rate will remain quite elevated and the level of inflation will remain below rates consistent with the Fed's objectives over longer term.
The unfolding week's economic calendar is pretty busy, with a few key first-tier reports such as the Labor Department's monthly non-farm payroll report for November, the weekly jobless claims report and the results of the ISM's manufacturing and services survey for November due to be released during the week. Traders may also closely watch speeches by Fed officials and President Barack Obama, while also keeping an eye on the results of the Treasury auctions of 30-year bonds (due at 9 AM ET on Thursday), 3-year notes (due at 11 AM ET on Thursday) and 10-year notes (due at 11 AM ET on Thursday).
The ISM-Chicago's manufacturing index for November, the Commerce Department's construction spending report for October, the National Association of Realtors' pending home sales index for October, the factory goods orders report for October and the revised third quarter productivity & costs report may also be on the radar of traders. Additionally, the Beige Book is likely to be scanned to find out anecdotal evidence of how the economic recovery is panning out in different federal districts.
After the strong rise in October, the ISM's manufacturing index isn't expected to advance significantly. The employment index's outsized gains in October are unsustainable and therefore, it is likely to retreat from the previous month's level. The regional surveys released thus far, namely the New York Fed's and the Philadelphia Fed's survey does not offer much hope for a substantial increase in the manufacturing index of the national survey.
However, the non-manufacturing index of the ISM survey could see an improvement following October's mild retreat, which positioned the index barely in the expansion zone. Improvement in industrial activity and underlying retail sales trend and the housing market should lead to greater demand for services.
The decline of the weekly jobless claims below the 500,000 level for the first time since October 2008 bode well for the monthly non-farm payroll employment. The job losses should continue to ease, in line with the recent trend. Meanwhile, the unemployment rate is expected to tick up slightly.
Monday
The results of the Institute of Supply Management-Chicago's business survey for November are scheduled to be released at 9:45 AM ET. Economists expect the business barometer index based on the survey to come in at 53.
In October, the business barometer index rebounded into expansionary territory, rising to 54.2 compared to 46.1 in September. The production index climbed 16.7 points to 63.9, marking the biggest gain in 13 months. Meanwhile, the new orders index surged up 15.1 points to 61.4, its highest reading since June 2007. The backlog orders index, although rising 5.2 points, still remained in contraction zone at 41.9.
At the same time, the inventories index continued to contract for the 12th straight month and came in at 32.2 for October. Meanwhile, the employment index remained little changed at 38.3. The prices paid index fell to 48.6 in October from the month-ago's 51.3.
Tuesday
Individual automakers are scheduled to release their monthly U.S. sales results for the month on Tuesday. 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 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 54.8 for November.
The manufacturing index rose to 55.7 in October from 52.6 in September, while economists had forecast a more modest 0.4-point increase to 53. The October reading represented its highest level since April 2006. Notwithstanding the improvement in the headline number, the new orders index fell by more than 2 points to 58.5 and the order backlogs index remained flat at 53.5. On the other hand, the production index rose to its highest level since July 2004, coming in at 63.3. Meanwhile, the employment index rose 7 points to 53.1, the first time the index was above the '50' cut-off mark since July 2008.
The Commerce Department's construction spending report to be released at 10 AM ET is expected to show a 0.4% decline in spending for October.
The September report revealed a 0.8% month-over-month increase in construction spending. The increase was unexpected, as economists had expected a 0.2% decrease for the month. Public construction spending rose 1.5% and private construction spending increased by a more modest 0.5%. In the private category, a 2.4% climb in spending on single-family construction offset the 4.1% decline in multi-family housing construction and a 1.8% drag from private non-residential construction spending.
Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. The index is expected to edge down 0.5% in October.
In September, the pending home sales index rose 6.1% month-over-month, with the optimism reflecting home buyers scramble to take advantage of the $8,000 first time homebuyers credit before it expires by November 30th. Economists had expected a 0.1% decrease for the month. Pending home sales rose by the most in the West, an area which witnessed a flurry of foreclosure activity, and the Midwest. The South also showed gains, while the Northeast showed a decline in pending home sales.
Philadelphia Federal Reserve Bank President Charles Plosser is scheduled to deliver a speech on the economic outlook to a seminar in Rochester at 12:20 PM ET.
Wednesday
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 private sector is expected to have lost 148,000 jobs in November.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.
Crude oil stockpiles rose by 1 million barrels to 337.8 million barrels in the week ended November 20th, with inventories remaining above the upper limit of the average range. Gasoline stockpiles moved up by 1 million and remained above the upper limit of the average range. However, distillate inventories fell by 0.5 million barrels, but they were above the upper boundary of the average range. Refinery capacity utilization averaged 80.1% over the four weeks ended November 20th compared to 80.4% 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.
Thursday
Federal Reserve Chairman Bernanke is scheduled to appear for a chairmanship confirmation hearing before the Senate Banking Committee. Additionally, Obama is due to hold a jobs conference with leaders from the business, labor, finance and the nonprofit sectors.
The Labor Department is due to release its customary weekly jobless claims report for the week ended November 28th at 8:30 AM ET. Economists expect claims to have increased to 483,000 in the recent reporting week.
Initial jobless claims, a key measure of layoffs, dropped 35,000 last week to a level of 466,000. This was the first reading below 500,000 this early January. Continuing claims fell 190,000 to a level of 5.423 million, the 10th consecutive week of declines.
The U.S. Labor Department is also scheduled to release its final report on third quarter non-farm productivity and unit labor costs at 8:30 AM. The consensus estimates call for an 8.5% increase in non-farm productivity.
The preliminary report released in November showed that third quarter non-farm productivity rose 9.5% compared to the previous quarter. The consensus estimates had called for a more modest 6.5% increase. The agency noted that the productivity growth was the strongest since the third quarter of 2003, when it rose 9.7%.
Meanwhile, unit labor costs fell 5.2% sequentially, with hours declining 5%, while output rose 4%. On a year-over-year basis, productivity increased 4.3%.
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 51.5 for November.
The services sector survey for October showed that the services index eased to 50.6 in October compared to 50.9. Economists had expected the index to climb to 51.5. The business activity index rose slightly to 55.2, representing the highest level since October 2007. The employment index moved down 3.2 points to 41.1, boding ill for the non-farm payrolls report to be released on Friday. While the new orders index rose 1.4 points to 53.6, the backlog orders index climbed 2 points to 53.5. The price paid index rose 4.2 points to 53.
Friday
The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM. The report sheds light on the number of paid employees working part time or full time in the nation's business and government establishments, the number of hours worked in the non-farm sector, the basic hourly rate for major industries and the number of unemployed as a percentage of the labor force. Economists estimate that the U.S. economy lost 114,000 jobs in November and look for an unemployment rate of 10.2%.
In October, the U.S. economy lost 190,000 jobs, a slowdown from the 219,000 reduction in non-farm payrolls in September. September's job losses were originally estimated as 263,000. Economists had expected the economy to lose 175,000 jobs in October.
At the same time, the unemployment rate surged to 10.2% in October from 9.8% in September. The rate came in much higher than the 9.9% rate expected by economists. Average hourly earnings rose 0.27% to $18.72.
The Commerce Department is due to release its report on factory goods orders for October at 10 AM ET. Orders for manufactured goods are likely to have increased 0.1% in the month.
Durable Goods Orders, which make up the bulk of factory goods orders, showed a 0.6% month-over-month decline for October. Orders, excluding transportation, fell by 1.3%. Notwithstanding 1.5% increase in transportation orders, total orders remained weak due to soft demand for machineries and electronic products. Shipments edged down 0.2%, while inventories remained unchanged. Non-defense capital goods orders, excluding aircrafts, fell 2.9%, reversing the 2.6% increase in the previous month.
Plosser is also due to deliver opening remarks at conference on Policy Lessons from the Economic and Financial Crisis in Philadelphia at 10 AM ET. Also scheduled to make a public appearance on the day will be St. Louis Federal Reserve Bank President James Bullard, who is due to speak at a Philadelphia Fed conference in Philadelphia at 1:15 PM ET.
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